If you thought business succession was complicated previously...

Budget changes are giving business owners a headache, says Norman Kennedy

For decades, family businesses have been passed from generation to generation without having to fund death duties. This is due to change from 6 April 2026.

Under current tax rules, owners of trading businesses can typically pass them on to their heirs free of inheritance tax (IHT), much in the same way as farmers are able to leave agricultural businesses and farmland to the next generation. This has been widely regarded as desirable as it allows for a business to continue without the successors having to fund a 40% tax charge when they inherit. Without this tax break, it was thought that many businesses would in time need to downsize, if not completely shut down.

The changes to business property relief (BPR) announced in last autumn's Budget have seen the strongest response from the agricultural sector, but owners of all types of trading business are affected.

The new rules will halve the tax relief from 100% to 50% on the value of the business above £1 million. Business owners are now having to reconsider their plans. Married couples can split businesses between themselves to double the allowance from £1 million to £2 million, but that is not always easy and still leaves the excess value over £2 million subject to a new effective tax rate of 20%.

Family business owners in this situation may be more likely to wish to see the business pass to their children during their lifetime, rather than as an inheritance under their wills. However, in order to save their heirs from suffering the 20% tax, the donor needs to survive seven years from the date of the transfer of ownership. Even if the former owner survives seven years, a gift of the business during the owner's lifetime comes with an immediate downside, as the much prized capital gains tax free uplift on a business owner's death is lost.

With the impending new tax regime, business owners may wish to reflect on issues other than tax before deciding on their options. Can they afford to give away the business and the associated income? Even if suitable heirs have emerged, are the current owners comfortable about passing the business to their chosen successors at this stage?

If owners do not wish to relinquish complete control, trusts could be one option to consider. Until 6 April 2026, those choosing to pass on the business earlier can still gift unrestricted values of BPR qualifying business assets into trust. However, a proposed new 3% tax charge will arise every ten years on the trust fund value in excess of £1 million. A gift to trust will be added back to the death estate if seven years have not elapsed since the time of the gift, so could end up still being taxed at 20%.

It remains to be seen whether or not the government will adjust any of the proposed changes, particularly on trusts, following a technical consultation planned for early this year. Nevertheless, business owners will almost certainly wish to review their business succession planning strategy, including their wills, with their advisers. More information on this topic: brodies.com/inheritance-tax-changes

Norman Kennedy is a Partner, Brodies LLP​