As sweeping changes to inheritance tax and business relief loom, succession planning has never been more critical. Stephanie Parish, Partner in Private Wealth at national law firm, Clarion, outlines how financial advisers can help family-owned businesses stay resilient, protect their legacy, and plan ahead before the 2026 deadline.
The 2024 Autumn Budget has ushered in a new era of evolving tax rules, presenting significant challenges and considerations for both individuals and organisations. Among those most affected are the UK’s 5.3 million family-owned businesses.
According to research by CBI-Economics, commissioned by Family Business UK, the government’s move to cap business property relief (BPR) and reform agricultural property relief (APR) has triggered a wave of uncertainty with family-owned businesses and farms across the UK cutting jobs, halting investment and selling assets to stay afloat in response to sweeping tax changes.
It has also projected a net fiscal loss to the Treasury of £1.9bn, undermining its own revenue expectations and job losses of 200,000 across family-owned businesses.
With tax changes set to take full effect in 2026, business owners should be considering proactive steps to prepare for these incoming changes. This includes understanding the specific effect on their business, and if necessary accelerated succession planning and onboarding the right legal and financial support, to make best informed decisions.
Passing the torch without getting burned
Following the Autumn Budget on 30 October 2024, there are major changes in store for family-owned businesses that will result in an increase in the cost of doing business. As of this month, companies will face an increase to employers’ national insurance and rising minimum wages, putting added pressure on their bottom line.
However, another key change announced in the Budget was to limit the availability of business relief (also known as business property relief). Business relief is an Inheritance Tax relief of up to 100% on certain business interests, most typically shares in a trading company. Currently there is no cap on that relief. Therefore, if someone died owning a £5m shareholding in their company, if they satisfied the conditions for business relief, they could pass that shareholding onto the family without any inheritance tax being due. Compare that to other assets which typically will be subject to inheritance tax at 40%.
The proposed changes however will cap business relief after April 2026 to £1 million for any single individual. For any value above this threshold, a 20% inheritance tax liability will arise. In the example above, potentially a £800,000 inheritance tax liability (20% of £4 million).
With these changes to inheritance tax due to take effect from 6th April 2026, family-owned businesses will likely want to consider passing on the shares in their lifetime sooner than they may have anticipated, rather than dying with them to trigger the inheritance tax. One thing the budget didn’t change was the usual “7-year rule” for lifetime gifts. Therefore, leaving business interests to pass on death, assuming 100% business relief can be claimed, may no longer be the most tax efficient plan.
Tackling succession challenges head-on
Family businesses are the backbone of the UK economy, contributing £575 billion annually to the UK economy (accounting to an IFB Research Foundation Report prepared by Oxford Economics in 2021-2022). However, recent research from STEP (Society of Trust and Estate Practitioners) found that 69% of family business owners admit they lack formal succession plans.
Business owners should review their succession planning strategy to ensure that their transfer of assets and wealth to future generations can be as efficient as possible under these new rules instead of impulsively halting investment or pulling the plug altogether on business plans.
Seeking advice from trusted advisers sooner rather than later can help mitigate any challenges involved when transitioning ownership to the next generation.
One recurring issue involves current shareholders/founders being reluctant to relinquish their beneficial ownership as they fear that they must similarly give up control, fearing excessive influence (or a change in direction!) from the next generation. Struggling to ‘pass on the torch’ is a recurring challenge in succession planning.
It’s also sometimes conceptually difficult to consider passing on ownership if the next generation is not yet involved in the day to day running of the business. There can also be a degree of nervousness if the next generation successor becomes divorced or bankrupt or wants to sell their shares, and the fallout that would follow.
On the other hand, there’s also pressure on the next generation receiving shares and questions around whether they even want to be involved in the business, to what extent and the family responsibility that comes along with it.
As the dilution of shareholdings between more family members can present a risk to the business, seeking legal and financial advice through the process is critical. Many of these worries can be addressed with good legal advice around Wills, nuptial agreements, shareholder agreements and family constitutions.
Planning for success(ion)
There is not a one size fits all solution to succession planning. Family businesses especially, have unique properties to them and the only way to overcome these challenges is through open dialogues and not only seeking advice but taking it onboard.
Transitioning ownership to the next generation is a topic that has traditionally been ignored, until the death of the main shareholder. However, with the changes to relief for inheritance tax, owners have to consider this sooner and start having these conversations earlier if they want to potentially mitigate the inheritance tax changes on the horizon.
We’re already seeing our clients start to consider more regularly a ‘giving while living’ strategy, where they gift assets such as their business shares while they’re living and breathing.
Cutting through the noise
While the Spring Statement on 26 March 2025 didn’t include any tax surprises, there’s already talk of further tax rises being announced and that is going to take a toll on family-owned businesses, leaving many to panic.
However, this is potentially just a case of Chinese whispers.
Family-owned businesses should turn to lawyers and tax and business advisors to cut through the noise and keep their ears to the ground to help safeguard the business and its assets, and mitigate potential challenges posed by succession.
