Options for succession planning.
In the past, owners of family businesses have had the luxury of adopting a perennial favourite strategy when it comes to estate planning — doing nothing. The availability of 100% business property relief from inheritance tax for shares in a trading company and a capital gains tax free uplift on death would enable the next generation to deal with the transition of ownership with a ‘clean slate’ from a tax perspective.
The forthcoming changes to business property relief announced in the 2024 Budget however change all that. From April 2026, the first £1million of business assets can be passed on tax free but inheritance tax will be levied at 20% on the rest. This rule change will fundamentally undermine succession planning for many business owners and there is an urgent need for those plans to be reviewed.
What options might there be?
Get married/Involve a spouse or civil partner
Couples who are married or who are civil partners can pass assets to each other on death and pay no inheritance tax. Whilst there should probably be reasons other than tax to get married, and marriage brings with it other estate planning potential risks, being — and remaining — married does mean that inheritance tax becomes a second death problem giving a couple longer to spend/make gifts and plan for the tax bill.
Faced with a substantial inheritance tax bill on the value of shares on death, for a start, a married entrepreneur may want to ensure his or her spouse also holds shares. This could involve gifting shares or the issue of a new class of shares to meet the threshold. This will at least give a married couple the benefit of £1million each of 100% relief.
Any proposal to transfer assets to a spouse or other family member should always be reviewed with the benefit of family law advice. There can be a tension between inheritance tax planning and the impact of a relationship breakdown and divorce. All needs to be considered holistically with informed decisions made having weighed up the pros and cons. See our report on the case of Standish v Standish for more information.
Re-do wills
At the same time, such a couple need to ensure that their wills bank the relief that is available. A straightforward will providing for everything to pass to the surviving spouse won’t achieve that. Wills leaving shares directly to children or into a trust on first death should be seriously considered.
Again, any proposal to transfer assets to a family member should be reviewed with family law advice given the risk of future relationship breakdown. Pre and post nuptial agreements can play a significant role in safeguarding resources for the benefit of a family.
Give away some shares
A direct gift of shares to children/grandchildren in lifetime is effective for inheritance tax planning so long as the person making the gift is still alive seven years after the date of the gift.
Bringing the next generation into the business however is not a step to be taken lightly. Thought needs to be given to the implications in terms of decision-making about the business and their day to day involvement, perhaps involving the creation of a family charter setting out everyone’s expectations for the business. Consideration should also be given to the next generation’s personal circumstances and relationships, as outlined above.
What would a transfer of shares do in terms of their own estate planning and what risks does it involve bearing in mind their financial position or personal relationships? A review of the articles or a shareholder’s agreement and the need for a pre or post nuptial agreement should all be discussed. Learn what happens to family businesses on relationship breakdown.
An alternative would be to consider the transfer of shares into the trust with family members listed as potential beneficiaries.
Paying the tax bill
In terms of thinking about finding the money to fund any future tax liability, a business owner may need to investigate life insurance. The financial viability of this, however, will be dependent on age and health.
In certain circumstances, it may be possible for the company itself to be able to buy back shares following a death to provide funds to pay the tax, although that can itself create tax implications which would need to be addressed.
Sell?
As a drastic measure, family business owners may feel that the tax landscape is now so severe that selling the business is the only sensible option. This may well involve some considerable preparation as the owner may not have previously given any thought to a disposal and always worked and ran and structured the business on the basis that it would be passed on. Read our tips on preparing your company for sale.
Conclusion
The key message for family business owners is that inheritance tax is now a business-critical issue.
Whilst there are those who may question the effectiveness of the change in relief to deliver more funds for the Revenue overall, what is certain is that succession planning for family businesses has become more complicated.
How to address the issue and considering options needs to be started as quickly as possible — without delay.
