Major changes to IHT: mitigating the impact on family businesses

There has been significant news coverage about the major changes to Inheritance Tax (IHT) reliefs, which are due to take effect from 6 April 2026. Families that expect to be affected by the changes should act now to review their succession plans and obtain professional tax advice on the impact of these changes

What is changing?

The Autumn Budget 2024 announced that from April 2026, 100% Business Property Relief (BPR) and 100% Agricultural Property Relief (APR) will be capped at £1 million per individual, with the excess value only receiving 50% relief. Although the fine details are yet to be published, it seems certain that the new rules will have a major impact on many family businesses.

BPR and APR are longstanding IHT reliefs which were designed to prevent the need for businesses and farms to be sold or broken up when passed to the next generation. The reliefs reduce the amount of IHT that is payable on death and on certain lifetime gifts, often reducing the IHT exposure on qualifying assets to nil.

What does it mean for family businesses?

• Business and agricultural assets exceeding £1 million, which previously attracted 100% relief from IHT, will be exposed to an effective IHT rate of 20%. This will create challenges for asset-rich, cash-poor individuals and businesses needing to meet IHT liabilities.

• The changes will also affect individuals making lifetime gifts of assets to individuals and/or into trust on or after 30 October 2024.

• Executors and Trustees will require more accurate valuations of business interests.

"Now is the time for families to consider the impact of the IHT changes and review their succession plans before the reforms come into force in April 2026. The sooner you start planning, the better."

 

Other IHT reforms

This article focuses on the BPR and APR changes affecting most family businesses, but other reforms to IHT were also announced in the Autumn Budget 2024.

The Autumn Budget announced changes to the taxation of non-UK domiciled individuals from 6 April 2025 and a reduction in the rate of BPR available on AIM-listed shares to 50% (with no £1 million threshold) effective from 6 April 2026. It was also announced that most undrawn pension funds and death benefits will be exposed to IHT from 6 April 2027.

Start planning now 

Individuals should take specific tax advice based on their circumstances before taking any action in response to the reforms. The points to consider include:

1. How are you affected by the changes?

• Are you in the scope of IHT?
• Evaluate whether your assets qualify for BPR and/or APR. 
• Are there any ‘excepted assets’ which would not qualify for relief?

2. What is the IHT exposure?

It is important to quantify all your assets (including pensions) and be aware of the likely IHT exposure. It could be significant.

3. How would the IHT exposure be funded?

• Paying by instalments - IHT liabilities relating to agricultural and business assets can be paid by instalments over a period of up to 10 years. Instalments of IHT on farmland and certain categories of shares and business interests may be interest-free, if paid on time.
  
  
• Funding via the business - although IHT is a personal liability, the successors of the business could look for the business to help fund the IHT liability, for example by way of a dividend or share buyback, but the tax consequences of this would need to be carefully considered. A business may wish to conserve cash or adjust pricing strategies to improve liquidity, but care should be taken to ensure that the cash reserves are not considered an ‘excepted asset’ for BPR purposes as this could increase the IHT liability further.
  
  
• Borrowing funds - if there are insufficient accumulated earnings to meet this liability, the business may need to consider borrowing funds.
  
  
• Selling part of the business – this may not be desirable or practical, and it is important to understand the potential tax consequences of doing so.
  
  
• Life assurance – consider taking out an appropriate life assurance policy to safeguard against IHT arising from lifetime gifts and on death. Financial advice should be sought prior to taking out cover.
  
  

4. What action could be taken?

• Uncertainties remain  – there are still a few unknowns in the background but it is important to start planning now.
  
  
• Lifetime gifts – consider making lifetime gifts, if practical to do so, but take professional advice to understand the potential tax implications of doing so; be aware that lifetime transfers may not always be the best option and could increase future tax charges.
  
  
• Trusts – consider the use of a trust rather than making an outright gift to the next generation.
  
  
• Exit options – consider exit options and/or a sale of the business. Specialist advice should be sought such as that provided by our Corporate Finance team.
  
  
• Good housekeeping and appropriate documentation - for example ensure robust legal agreements are in place to evidence the ownership of assets. Updated Partnership Agreements and Wills may also be required.
  
  
  

How Shorts can help

If you or your family would like to discuss your circumstances, and how you might be affected by the upcoming changes, then our team would love to hear from you. Click below to Get in touch.