First announced in the October 2024 Budget, the reforms limit the extent to which these reliefs can shield businesses and agricultural assets from inheritance tax, marking a notable shift for those planning how ownership will pass between generations.
At present, trading businesses and agricultural property can qualify for full inheritance tax relief on an owner’s death. However, from 6 April, these reliefs will be capped at £2.5 million, with only 50 per cent relief available on value above that threshold. This means that businesses and farms exceeding this cap will face a 20 per cent inheritance tax charge on the excess.
These reliefs have historically played a crucial role in helping family firms survive across generations. With only around 30 per cent making it to the second generation, 12 per cent to the third and just 3 per cent to the fourth, the removal of full relief represents a significant shift in the family business landscape.
The changes will also affect succession planning carried out during a business owner’s lifetime. Many family businesses have used trusts to retain control of shareholdings – allowing trustees to operate the voting rights on the shares while the underlying value is transferred into the trust.
Trusts, however, typically rely on the same reliefs that are now being restricted. Since major reforms to trust tax in 2006, most lifetime trusts have already been subject to inheritance tax charges on assets being transferred to the trust and on an ongoing basis thereafter. The new cap will therefore limit the extent to which trusts can continue to be used for succession planning, as any value above £2.5m will give rise to an inheritance tax charge.
As the new relief cap limits the tax advantages of using trusts, families may increasingly look to company structures to manage succession. In recent years, family investment companies have become a popular way to hold, control and pass family assets to the next generation. Although they are ‘ordinary’ companies, their articles of association can be tailored to suit the specific circumstances of the business owner and their family. They are often used when a business is sold and the owner wishes to consider succession planning while retaining an element of control, helping to avoid situations where younger generations gain access to significant wealth at a young age.
While these companies are commonly set up as new entities, an existing company’s articles can also be adapted to create a similar structure. This might involve introducing different share classes and retaining key control rights within a class held by the business owner.
Although typically used after a business exit, these structures may now become more common for trading businesses as the scope for trust planning reduces from April. With control retained in one share class, families may feel more comfortable bringing the next generation into ownership at an earlier stage – supporting both succession planning and the earlier transfer of value for inheritance tax purposes.
Against this backdrop, it’s more important than ever for business owners to consider succession planning at an earlier stage. By aligning business and personal objectives, families can put in place arrangements that allow wealth to pass sooner while ensuring appropriate control remains in place. Careful planning will be key to avoiding unexpected inheritance tax charges and supporting the survival of family businesses across generations.
