Inheritance Tax And Succession Planning For Family Businesses

For family businesses, passing wealth and control to the next generation can be both a strategic and an emotional journey.

However, evolving tax legislation is putting increasing pressure on these transitions especially in light of upcoming changes to Business Property Relief (BPR) and rising tax burdens such as National Insurance increases.

These developments are prompting many families to reassess their business structures and succession planning. In this article, we will explore the key tax and non-tax considerations, outline practical steps to take now, and offer guidance on how to future-proof your family business before it is too late.

Understanding the changes to BPR

BPR currently provides up to 100% IHT relief on the value of qualifying business assets passed on during lifetime or upon death. However, with effect from 6 April 2026, a £1million cap will apply to the 100% relief marking a significant departure from the current rules. It is important, now more than ever, to review the availability of BPR if you have a trading business.

Key considerations include looking at whether the business:

• Holds significant non-trading assets, such as investment properties or excess cash not actively used in the business.

• Has mixed trading and investment activities, such as a property development company that also holds a portfolio of rental properties within the same business or company group.

Along with the existing criteria for BPR and the new £1million limit, individuals with family business interests will now be more exposed to an IHT tax charge on death where previously this was fully covered by the BPR relief.

Non-tax considerations in succession planning

A business structure which is tax efficient can still fail if attention is not given to involving the right people, and without appropriate governance. For succession planning to be a success, it must also address:

• Family governance structures - Set up formal governance structures such as a family board, shareholders agreement to define roles, responsibilities, voting rights, and participation rules.
  

• Communication and transparency - Regular family meetings can help share business intentions and explain the rationale behind decisions which can include things like equity, roles, and compensation structures. Through having open lines of communication and maintaining transparency, the potential for resentment or misunderstandings in the future can be reduced. Involving an independent trusted adviser can also help with internal dispute resolution and can prevent disagreements or be the ‘voice of reason’ providing unbiased contributions.
  

• Leadership development - Identify and mentor the next generation of leaders early. Develop succession plans, encourage internal and external work experience to support training on understanding and running the business.

Practical steps family businesses should be taking

1. Review eligibility for BPR under the new rules

• Conduct a full review of business operations, asset holdings, and ownership structures to determine if the business meets the “wholly or mainly trading” (i.e., at least 50% trading activity).
  

• Assess non-trading elements such as:

  • Excess cash not used for working capital or not earmarked for specific business purposes.

  • Investment properties or securities.

  • Loans made to and from the business.
    

• Obtaining a valuation of the business and your shareholding will also be helpful in determining the potential IHT exposure.

2. Consider restructuring the business

• Use group structures (e.g. holding company and subsidiary) to ringfence trading and non-trading activities.
  

• Transfer investment assets to a separate holding company to avoid tainting the trading business and losing BPR altogether. This may be suitable in circumstances where the ‘50% wholly or mainly test’ is not met.
  

• Ensure the business operates as an active trade and avoid passive income investments that may disqualify the business from BPR.

3. Review and update your will and LPA

• Review your will to ensure it reflects the current business structure and ownership as well as being tax efficient.
  

• Include provisions for business continuity, such as cross-option agreements and trustee appointments.
  

• Changes in legislation can sometimes lead to unintended consequences which could mean your will no longer aligns with your wishes.
  

• Consider putting an LPA in place to ensure your business affairs can continue to be managed in the event you lose capacity. If you decide to implement an LPA, ensure that your partnership/shareholder agreements, and articles of association allow actions to be carried out under an LPA.

4. Create a succession roadmap

• Define a clear timeline for transferring leadership and ownership, ideally over several years.
  

• Define ownership versus management roles. These do not have to be the same people. For example, younger family members may inherit shares without immediately stepping into management roles.
  

• Consider appointing external advisors or non-executive directors to support the next generation with independent guidance.

5. Make use of lifetime gifting strategies

• Transfer of shares or business interests to individuals would be potentially exempt transfers for IHT which means no IHT is payable if the donor survives seven years.
  

• Use the capital annual exempt allowance (£3,000 per donor per year) and regular gifts from surplus income rules to pass on value tax-efficiently to the gift recipient.
  

• Structure gifts with growth shares or freezer shares to cap current values and pass future growth to the next generation.
  

• Consider the use of trusts and family companies to keep control and asset protection within the family and protection from IHT.

6. Involve and educate the next generation

• Provide financial literacy education and business mentoring to younger family members.
  

• Let them take part in board meetings, strategic planning, or lead small projects to build capability and experience.
  

• Consider shadow boards for the next generation to provide a platform for their voice and ideas without immediately handing over control.

What family businesses need to do now

With HMRC’s strict review on the application of BPR and an ever-changing tax landscape, family businesses must:

• Act sooner rather than later: Waiting until a triggering event (death, illness, or dispute) often leads to rushed and costly decisions.
  

• Engage with professional advisors: Tax advisers, solicitors, accountants, and family business consultants should all work together to create a well-balanced and tax efficient plan.
  

• Address both tax and family dynamics: A tax efficient structure that creates resentment or legal challenges within the family will ultimately fail.
  

• Treat succession as a journey: This journey should ideally begin before any transfer of control or ownership and requires commitment, patience and planning.

Family businesses are viewed as legacies. Without careful planning, both tax liabilities and family tensions can unravel decades and generations of hard work. With new limitations on BPR, it has never been more important to reassess your structure, engage the next generation, and implement a succession plan that balances tax efficiency with family harmony.

A key part of this process is starting conversations with younger family members as early as possible and continuing them regularly to understand when and how they wish to be involved.

Equally important is recognising how their individual talents and aspirations may shape their contribution (or lack thereof) to the business in a way that respects both their goals and the legacy of the business.