Peter Gouw
Valuations and Tax Partner
For business owners starting to get to grips with the recently announced changes to inheritance tax (IHT), it is vital to know what your business and other assets are worth and to review your IHT position.
The government’s announced changes to Agricultural Property Relief (AR) and Business Property Relief (BR) are expected to have significant impact on the IHT liabilities for business and farmland owners. This article focuses on changes to BR and advice for business owners on how to manage the impact.
We are already speaking with many business owners on how to deal with the consequences of the changes to AR and BR from IHT.
IHT liabilities can substantially increase as a result of these changes so careful planning is needed particularly in cases where the estate would have been relying on the previously available 100% BR and AR from IHT.
In the past, many business owners held onto shares in their trading company until death, passing them to the next generation without incurring IHT. There was also the added benefit of a Capital Gains Tax (CGT) base cost uplift on death to market value. While the CGT uplift remains in place, the 20% IHT charge on assets over £1 million will in most cases mean that it is no longer attractive to hold qualifying assets until death.
However, the changes to BR and AR create succession planning challenges for business owners, particularly in owner-managed businesses. The key considerations now are how to pass on wealth to the next generations in a tax-efficient manner and how to fund any IHT liability that may arise.
A first step is to consider the estate’s IHT exposure based on these changes and revisit the current Will. This may require a valuation of the shares in the business.
Need to discuss the value of your business in more detail?
You may also want to consider the options explained below as part of your wider IHT planning strategy. As ever, tax planning is only one factor and should be assessed along with wider commercial considerations in any decision.
Learn more on IHT business relief
A direct gift to the next generation is still a tax-efficient solution where there is a significant chance of the donor being alive seven years after the date of the gift. After seven years, the gift falls out of their IHT estate. You should check whether the conditions for claiming Gift Hold-Over Relief in relation to Capital Gains Tax (CGT) are met.
It is important to note that the conditions for ‘qualifying assets’ under BR from IHT are different to those required to be met under Gift Hold-Over Relief for CGT purposes.
If the donor does die in this period, the value of the assets gifted at the time the gift was made could become taxable. Gifts given in the three years before death are taxed at 40%, while gifts given three to seven years before death are taxed on a sliding scale known as ‘taper relief’.
Shares can also be settled into a trust for next generation as an alternative to a gift. It should be noted that settlements after 30 October 2024 but before 6 April 2026 shares can still go into trust initially without triggering IHT charge. However, should the settlor die post 5 April 2026 and before 7 years after settlement the value over the new BR limits, tax will be payable on death.
Trustees must pay a charge on every 10-year anniversary of the date when the trust was set up if the trust holds ‘relevant property’ such as money, shares, houses or land, with a value above the Inheritance Tax threshold. So, planning how these charges will be financed is an important consideration.
Discuss what options are best suited to your circumstance with our Tax and Valuation team
If you are considering a sale of your business, there are many commercial and tax aspects to consider. The sale could make the estate less concentrated in one investment and improve liquidity. The proceeds from the sale can be invested in a diversified portfolio and will allow more options to be considered in terms of IHT planning. The current CGT rate is lower than the current IHT rate.
You may also consider an AIM IPO as a strategic exit option for your business. Most investments in companies traded on the Alternative Investment Market (“AIM”) qualify for BR, and under current UK tax rules any shares in these companies can be passed on free of IHT once you have held them for two years, albeit with effect from 6 April 2026 the IHT relief will be restricted to 50%.
Learn more about IPO readiness.
Our M&A team can help in reviewing strategic options for the sale and marketing of your business. Vendor Due Diligence (VDD) can be a good additional selling point in providing detailed information for potential buyers. Our Transaction Services team can help with the VDD.
If you are considering a business exit solution and want to discuss how to go about selling your business. Contact our Transaction Services and M&A teams.
Selling a business to an Employee Ownership Trust (EOT) remains a practical and cost-effective option for business owners. It allows shareholders to sell their company indirectly to their employees via a special form of UK trust.
UK resident shareholders are, subject to satisfying certain statutory conditions, able to sell a controlling interest in their company for a full commercial market value and claim a complete UK CGT exemption on the disposal proceeds. Also, no IHT liabilities should arise in respect of the disposal.
The total number of UK Employee-Owned (EO) businesses in Q4 2024 was over 1,600 with more than 330 new EO businesses created in 2023 and numbers growing by 35% pa. This means that the EO
sector is now the fastest-growing SME business ownership model with, on average, one company becoming EO every single day.
Some material changes to the tax rules in relation to a sale of shares to an EOT were announced in the recent budget. However, these changes are designed to stop potential misuse of EOTs and should not, in our view, materially reduce the attractiveness of EOTs for the majority of shareholders wishing to establish an EOT.
Find more information about how you can sell your business to an EOT
Once the business has been sold to the EOT, the cash proceeds will form part of the former shareholder’s estate for IHT purposes. So, gifting assets pre-sale can be very tax effective especially where family members work in the business. We strongly recommend taking IHT advice pre- and post- the sale to avoid triggering unexpected IHT liabilities.
Contact our Share Plan & Incentives team and Valuation practices to discuss your options further
Business owners should also reconsider the share capital and ownership structure of their business.
As mentioned previously, as any unused IHT entitlement does not pass to the surviving spouse on death, so it will be important to ensure that spouses hold at least £1m of qualifying assets each. This could involve gifting existing shares or issuing a new class of shares to meet that threshold.
There might be a need to rethink the share rights where shares are to be settled into a trust to ensure that the value is restricted to £1m limit to prevent upfront charges.
The use of growth shares has been a common means to transfer wealth to the next generation for investment companies but has not been common for trading companies due to the reliefs from IHT available to them. This now has become a more viable option and can be used to transfer wealth either directly or via trust.
Does your business have a complex capital structure and need to calculate the value of your business’s shares, contact our Valuation Team
Business owners that are planning to retire or move abroad may have a wider range of options but there are complex new rules to consider from 6 April 2025 – particularly if owners are not domiciled in the UK.
One of the main challenges in relation to the changes to the IHT reliefs is in relation to funding tax liabilities, a couple of options can be considered:
If your preferred choice requires raising funds, then speak to our M&A team who can help you with raising external funds for your business.
It is essential to reassess and adjust your IHT strategy now. Understanding the valuation of your assets and what your options are the first key steps in the process. Our Tax and Valuation teams are here to help you navigate these complexities and ensure your succession planning remains tax-efficient.
