In last year’s Budget, the Chancellor, Rachel Reeves, announced some sweeping changes to Inheritance Tax (IHT) affecting the farming community. We have seen tractors up and down Whitehall opposing these changes. However, these changes coming into force on 6 April 2026 go far further than has been appreciated and affect owner-managed businesses in every sector. The purpose of this insight is to explain what the law currently provides, what changes are due to come into force and what planning could be considered. If you are running a business valued at more than £1million on a hypothetical sale, you are affected by these changes and the window to act closes on 5 April 2026, which will be far sooner than you think.
Where are we now?
Where an individual passes away, their Executors will need to report details of their assets and liabilities on an Inheritance Tax Account to HM Revenue & Customs (HMRC). For business owners, this would include the full market value of their interest in the trading business, regardless of whether this is operated as a self-employment, a partnership or an unquoted company. Where the individual held their business interest for two years before their passing, the Executors could claim a 100% Business Property Relief (BPR) exemption, which means no IHT is due on that asset. As the business interest was subject to IHT, albeit exempted, for the beneficiaries, there is a tax-free uplift in the value of the interest for Capital Gains Tax purposes.
Conversely, where an individual gifted all or an element of their interest in the trading business during their lifetime, they needed to survive for seven years for this to fall out of their Estate for IHT purposes. However, unlike the situation when an individual passed away, there was no Capital Gains Tax uplift on the gift, and the recipient of the shares usually acquired them with the same base cost for Capital Gains Tax purposes as the original owner.
Why this is a problem
The rules as constructed created two main issues. Firstly, there was little or no incentive to make gifts of business interests during lifetime as there was a tax-free uplift on the passing. In farming, where succession can be an issue, this has left a lot of family farms owned by the patriarch or matriarch in their 80’s and beyond. Secondly, this has led to accusations that the rules are being used to gain an advantage that was never envisaged, which is to acquire tax-advantaged assets simply to avoid IHT and the beneficiaries would just sell them after the individual passed away.
What changes have been announced?
From 6 April 2026, where an individual owns BPR-qualifying assets (other than AIM shares), then only the first £1million of value will now be exempt from IHT. After that, the next 50% will be exempt with the balance being taxed at the usual rate of 40%. As such, if an individual’s shares are valued at £10million when they pass away, the IHT would be £1.8million. For the continuing business owner, one needs to consider how the tax is settled without generating further income tax liabilities. The effect could lead to the very thing that the law was brought in to avoid; the sale or the break-up of the business.
Where a lifetime gift is made of BPR qualifying assets, then the same rules apply on the need to survive seven years and whether the asset (or a replacement BPR qualifying asset) has been retained.
Why these changes look at the issue the wrong way
When introducing the legislation, the Chancellor felt that the current law was unduly generous to individuals owning a specific class of asset and the change was to redress this imbalance with a lower tax rate. However, there is more than one way to achieve a policy objective. So, if the intention is to “reward” the passing of an owner-managed business to future generations, then this could be achieved by restricting the benefit of the Capital Gains Tax uplift.
Let’s go back to the example above with the individual owning shares valued at £10million. On their passing, the IHT is exempted, but conditionally on the assumption that next generation continue. After one year, they sell the shares for £11million. Under the current system, there is a capital gain of £1million and very restricted tax take. Instead, we could create a system where the uplift is restricted and tapers away over time, say ten years. So, assuming the deceased has no base cost and the uplift vests equally, the base cost would be 10% of the £10million, so just £1million, meaning that the gain would be £10million. If there was a concern that people would leave the country and sell the asset, you could alter the law to ensure that this would still be due regardless of residence. A far better tax-take geared to a sale where the business did not continue.
Despite raising alternatives, the Government seems set on enacting the law as is, so the question is what one does before the change.
What to do before 6 April (if anything)
Tax does not operate in a vacuum and business owners have always had to consider the best time to pass their business on, but that now involves more factors. Passing control or benefit of a business to the wrong people, at the wrong time, or without wider family or corporate governance has the potential to do far more damage to the overall wealth than future taxes. There is never a solution that suits all situations, though good corporate and family governance is based on open communication and dialogue between everyone affected. Whilst doing nothing may be an option, not discussing succession is rarely a good option.
The immediate issue is to discuss the role of the business in the family’s overall picture. Is this going to continue after the current owners pass away or step away? Are there other family members stepping into roles? Are there family members not involved in the business? What is the long-term plan for the business? Once these longer-term, existential questions have been considered, then the tax can follow along. There is no “one size fits all” solution from a structuring perspective, though there are potential options to consider, including outright gifts of shares, creating a family trust, a Family Limited Partnership, taking out life insurance and creating a new class of shares for future generations. It may be that there is more than one option that can be implemented.
Where businesses are held by a small group of individuals, there needs to be wider discussions in terms of the effect where an individual passes away, how their family is protected, what happens to their interest and how they exit the business. This needs a discussion between the owners as to what would happen and potentially putting in place a Shareholders’ Agreement.
How can HaysMac assist?
Our Private Client Team have deep experience in working with business owners from inception to business sale, and beyond. We can discuss your needs, plans and aspirations in light of the upcoming changes, working with you to implement a plan using the tools at our disposal.
