Inheritance tax risk for family owned businesses

Karen Chadwick, Private client tax partner, HURST - Croner-i

Karen Chadwick, private client tax partner at Hurst, warns family business owners to take urgent action before imminent overhaul of business property relief craters inheritance tax (IHT) advantages and threatens the future of generational family businesses.

There remains ‘a window of opportunity’ to act and it is vital to start the process now as the clock ticks towards next April, when the reforms will come into effect.

Under current rules, family businesses and farms can be passed down to younger generations on death without an IHT charge, subject to conditions being met, under business property relief (BPR) and agricultural property relief (APR).

However, from April 2026, the full rate of relief will be limited to the first £1m. The balance will qualify for only 50% relief.

Shares worth £10m, for example, will receive £1m relief and 50% of the remaining £9m will be taxed at 40%, leading to a £1.8m hit.

The changes will mean thousands of generational family businesses will be exposed to inheritance tax for the first time in many years.

Family businesses provide 25% of all private sector jobs in the UK and it’s a worrying time for them. Together with farmers, these business owners are imperative to the backbone of the UK economy and the employment market.

The measures have sent shockwaves through the family business and farming communities. There is widespread concern over how many will be able to survive in the long term, with the passing on of their generational businesses now hugely under threat without having to sell assets to cover the tax bill.

As things stand, the changes could mean the end of many generational businesses.

With the Budget looming, there could be changes to other tax policies, so it’s crucial to act now before legislative and fiscal tightening makes proactive preparation more difficult.

There’s a window of opportunity and we strongly recommend immediate reviews, action and planning to protect their estate, their family and their legacy.

Some family business owners are accelerating their succession planning or exit strategies, reducing their stakes, looking at demergers or ways to extract funds from their companies during their lifetime, or gifting shares to their children.

There are also other options which could mitigate the impact of the changes.

A lot of people are considering taking out life insurance to provide peace of mind, as on death the policy will pay out a sum that covers the IHT bill.

There is also the option of transferring shares in a company into a trust, which can currently qualify for 100 % IHT relief.

Pension plans and wills should also be revisited to assess and manage future inheritance tax exposure.

There is a need to plan to utilise and maximise all available reliefs. For people who have worked hard over many years to accumulate wealth, there is a lot at stake.

Now is the crucial time to be taking action. If family business owners delay thinking about it until the new year, it’s going to be tight to be able to fulfil their plans with just three months to go.