Succession planning is a crucial aspect of any family business. However, recent tax reforms announced in the Autumn Budget have introduced significant changes, including a £1 million limit on the value of assets qualifying for 100% Business Property Relief (BPR) or Agricultural Property Relief (APR).
We explore the key strategies family businesses could implement to alleviate the impact of these reforms, safeguard their legacy, and minimise the tax implications.
Transferring assets
Early succession planning will become even more paramount ahead of the planned inheritance tax changes announced by the Chancellor.
By transferring assets well before death, families can take advantage of the seven-year rule applicable to potentially exempt transfers (PET), which essentially exempts from IHT gifts that are made between individuals more than seven years before death. This requires careful planning so that the current owners retain sufficient income and capital to support their needs, while care must also be taken to ensure that the transfer does not fall foul of the Gift with Reservation of Benefit (GWROB) anti-avoidance rules. The GWROB rules aim to prevent an individual from reducing the value of their estate for IHT purposes while retaining an interest in the assets ostensibly given away.
It should be noted that anti-forestalling measures mean that these new rules will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026. So a lifetime gift to an individual of property qualifying for BPR or APR at 100% under current rules, made on or after 30 October 2024, where the donor dies on or after 6 April 2026 but within seven years of the gift, will be a failed potentially exempt transfer to which only 50% relief will apply.
What are BPR and APR?
These reliefs reduce the value of business property or agricultural property when calculating how much IHT is due, either on death or when transferring a property into a trust, at a rate of 100% or 50%. For further insights on these reliefs, our latest Private Wealth podcast covers what this could mean for rural business owners.
Use of trusts
Trusts can be an effective tool for managing IHT liabilities. By placing BPR and/or APR-qualifying assets into a trust, families can potentially reduce the impact of the reforms and manage the distribution of assets over time.
Transfers into trust are ‘chargeable lifetime transfers’ and subject to IHT at 20%; the current IHT regime applies decennial charges (a 10-yearly charge) at a rate of 6% to relevant property held within the trust. Currently, assets qualifying for BPR or APR at 100% are relieved from the 10-year charge.
The introduction of the new rules will see the same implications for trusts as outlined above, namely that qualifying assets with value in excess of £1 million will be subject to 50% of the decennial charge. This does, however, represent a significant saving when compared to the position for those assets as part of a death estate (3% versus 20%). Therefore, it may be advisable for qualifying assets to be settled onto trust ahead of April 2026 to take advantage of full APR or BPR on the transfer into trust. Again, consideration must be given to the GWROB provisions to ensure this form of planning is effective.
Reviewing wills and estate plans
Regularly reviewing and updating wills and estate plans is essential to ensure they reflect current laws and the family’s wishes. This includes considering the impact of the new IHT rules and making necessary adjustments to minimise tax liabilities.
It’s common for wills to direct assets to the surviving spouse to take advantage of the IHT exemption for interspousal transfers, however, it does not appear that the £1 million allowance will be transferable to the surviving spouse on death, to the extent that it is unused. Assuming this is the case, consideration should be given as to whether qualifying assets should be transferred to other beneficiaries (or a trust) in order to bank the allowance and ensure that it doesn’t go to waste.
Life insurance policies for family businesses
Life insurance is also going to be a more important consideration for owners of family businesses going forward. Under the current rules, where a policy is written into trust, life insurance proceeds will fall outside an individual’s estate for IHT, allowing the next generation to pay the IHT bill and keep the business going.
The importance of professional advice
The proposed IHT reforms will inevitably make some family businesses (particularly those with substantial assets) question whether they have a viable business to pass on to their successors after the IHT liabilities are settled. However, with careful planning and open conversations, it’s possible to mitigate the impact of these changes. The obvious way to manage these provisions is to start planning earlier and ensure that the full impact of the proposed changes has been considered.
How we can help
We can help family businesses review their business succession plans and shareholders’ agreements, as well as the personal positions of key stakeholders. By proactively addressing these issues, family businesses can continue to thrive and pass on their legacy to future generations, despite the changed tax landscape.
Please get in touch if you have any questions on the upcoming tax reforms or would like to discuss any of the planning strategies outlined above for your family business.
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