Recently announced changes to inheritance tax planning following the Labour Government’s October Budget are the biggest changes in a generation. This article will cover the following key points

• Reduction in inheritance tax relief: The October 2024 Budget introduces a significant reduction in Business Property Relief (BPR) for trading company shares from April 2026, with full relief capped at £1m and only 50% relief on shares exceeding this value.
• Impact on family businesses: Increased IHT liabilities could pose severe financial challenges for estates and family businesses, potentially leading to forced sales or cash flow issues.
• Succession planning urgency: The changes necessitate immediate action to review and implement succession and estate planning strategies before the new rules take effect.
• Complexities in tax & legal strategies: Business owners face a range of options, from lifetime gifts and trusts to life insurance and share restructuring, each with unique tax & legal implications.
• Potential anti-forestalling measures: Pre-emptive IHT planning needs to account for anti-forestalling rules that prevent circumvention of the new relief limits.
• Professional advice is essential: Navigating the changes requires expert tax & legal advice to protect business assets, plan for IHT liabilities, and secure the future of trading companies.

Inheritance tax (“IHT”) before the Budget

Shares in privately owned trading companies qualified for 100% relief from IHT (charged at 40%) before the Budget on 30 October with no upper limit on the value of the shares. Therefore, IHT planning usually involved ensuring that individuals left shares in a family-owned company to adult children or a discretionary trust rather than to the surviving spouse to maximize the IHT relief. Shares (and any other assets) left to a spouse (or civil partner) are free of IHT. No requirement existed to consider lifetime gifts or other planning with shares in a family trading company.

IHT after the Budget – changes from 6 April 2026

With effect from 6 April 2026, the value of BPR will be restricted to 100% relief on the first £1m of value of shares in a trading company. Any value of shares over £1m will be subject to 50% relief from IHT and therefore an effective tax rate of  up to 20%.

Example 1

John owns 100% of the shares in the family company which is worth £2m when John dies on 30 April 2026. The first £1m will be subject to 100% relief from IHT and the balance will be subject to 20% IHT creating a tax charge of £200,000. If John had died on or before 5 April 2026, there would be no tax payable on the shares.

The £200,000 is payable by John’s estate. In these circumstances, it is possible to elect to pay the IHT in instalments over 10 years, so £20,000 per year. As long as the instalment is paid on time, no interest will be due on the unpaid tax. If an instalment is paid late or the conditions for instalments are not met, interest will be payable at the rate of 4% above the Bank of England base rate.

In reality, the estate will have to receive a dividend from the company to pay the tax, with the dividend being subject to income tax in the hands of the estate (or more probably the new owner of the shares under John’s Will). The dividend will likely be subject to an income tax rate of around 40%, so the company will have to pay a dividend of around £40,000 per year. The estate or new owner faces a real risk of incurring interest charges if it cannot fund the tax payments.

Example 2

If John and his wife Jane owned the company on a 50:50 basis, each of them would be entitled to the £1m relief from IHT on the shares. However, they must ensure that they do not leave their shares to the surviving spouse to avoid wasting the £1m relief.

The £1m Business Property Relief (BPR) allowance is not transferrable to a surviving spouse.

Suppose John has other assets (which is very likely) such as a house, car, furniture, paintings and pensions etc. In that case, the availability of the residence nil rate band of £175,000 will be restricted by £1 for every £2 by which John’s estate exceeds £2m. This means that John will lose his residence nil rate band if his other assets exceed £350,000 in value (and are not left to Jane which delays the problem until Jane dies).

The IHT bill gets higher with a more valuable company. If the company was worth £10m, John’s estate would face an IHT liability of £1.8m if he was the sole shareholder. Having to pay £180,000 a year out of post-tax dividends would place a huge strain on any business. It would certainly concentrate the mind of any new shareholder and management team as to the viability of the company and its ability to invest for future growth.

What can shareholders do?

Shareholders who die on or before 5 April 2026 will be subject to the current rules and therefore their estate will qualify for 100% relief from IHT. Owners in poor health or elderly (or both) may wish to delay implementing any serious IHT planning until shortly before the 6 April 2026 deadline. Anti-forestalling rules ensure that any lifetime gifts made between now and 5 April 2026 and which fail because the donor dies on or after 6 April 2026 will be subject to the new IHT rules and the restrictions on IHT BPR.

Owners who are in good health or are younger wishing to retain ownership or control of the company could consider a combination of the following:

• Lifetime gifts of shares to the next generation (subject to pre and post-nuptial agreements for married children) and hope to live for seven years (by which time the shares gifted fall out of the estate for IHT)
• Transfers into trust (subject to any limits imposed by anti-forestalling legislation on the value transferred before a lifetime IHT charge is created at 10%, assuming 50% relief because of BPR)
• Do not change any current trusts owning shares in a trading company (there will be a 10-year charge on assets within the trust which will be at a 3% effective rate of tax for shares qualifying for BPR). The 10-yearly charge is quantifiable and certain allowing for budgetary planning
• Life insurance to pay any IHT charge on the ownership of shares or failed lifetime gifts
• Create different classes of shares to transfer capital value while retaining voting control and the right to income
• A sale of the company to the next generation i.e. a family buyout

Owners who do not plan to leave the company to the next generation (or have no children or relatives interested in or capable of running the business) could consider:

• Planning for a trade sale by preparing the business to maximise its value and attractiveness to a third-party buyer. Capital gains tax rates at 24% are still attractive compared to income tax at 45%
• A sale to an employee ownership trust with no CGT but potentially a long period before which the consideration is paid
• Becoming a non-UK resident and selling the company when resident for tax outside the UK (and staying outside the UK for at least 5 years). Perhaps a step too far for most owners

All sale options result in the receipt of cash which is subject to potentially 40% IHT. However, the ex-owner can consider lifetime gifts of cash or enjoying the fruits of their hard work by spending the proceeds.

Next steps

The changes to the IHT regime are wide-ranging and the biggest impact on IHT planning for a generation. Succession and tax planning are always hugely difficult and emotive decisions which are often ignored or put off. The effect of doing nothing before 6 April 2026 could be catastrophic for the future of a family company if faced with an unexpected IHT liability. The only option may be a sale of the company, most probably on a “fire sale” basis.

For business owners interested in minimising their tax exposure it is essential that they take professional tax and legal advice and consider the impact of the changes on their whole estate. A 16-month window exists before the changes come into effect, which is not particularly long to alter an existing company structure to maximize your ability to claim the reduced IHT relief.

Geldards are working with clients and their tax advisers to proactively minimise the potential catastrophic IHT liability and to give certainty to business owners and their relatives.

If you require any assistance with tax planning, please contact the Geldards Corporate Team.

Disclaimer: do not take any steps based on this article without taking professional advice