“My family will not pay Inheritance Tax – I have a business and a pension”
Contrary to popular belief, more people in the UK are employed by family businesses, than by multi-national companies. For over forty years, successive governments have been encouraging everyone to take out private pensions, as they foresaw the shortfall between the longevity of modern-day life and the contributions to the state pension system.
However, following the announcements in last year’s budget, the Government is proposing to introduce restrictions on the ability of family business owners to pass their business to the next generation. Legislation which will affect the taxation of businesses so far as Inheritance Tax (IHT) is concerned is due to come into force with effect from 6 April 2026.
The Government has also announced that as from April 2027, changes will be made to the IHT treatment of Pensions.
Both these changes will affect your ability to pass on your wealth to the next generation.
The Myth: I can pass the total value to my business free of Inheritance Tax
Before the last budget this was reality, and not a myth. Provided your business was a trading business, and all the assets qualify for Business Property Relief (BPR), then the total value of the business, irrespective of the amount, could be passed down to the next generation free of IHT. This was subject to certain conditions – for example, the next generation continuing the business for a specified period of time.
Unfortunately, this will no longer be the case after 6 April 2026, as the value of BPR will be capped at £1M per estate, 50% of the value of any business over and above that figure will be subject to IHT and payable at a rate of 40%.
It is important to take proper advice concerning your business as not every asset used in a business may qualify for BPR. The nature of the assets used in the business can affect the impact of BPR. Currently, certain businesses, such as a property investment business for example do not qualify for BPR and this will not be changed under the proposed the new rules.
There has been a lot of comments regarding these changes, but as usual the devil is in the detail and as with everything in life, by careful planning and thinking about the future, it might be possible to mitigate the impact of the changes and depending upon the value of the business, this might mean that either the full value of the business, or a great proportion of it, can be inherited by your family free of IHT.
The Solutions
There are a few solutions that might be available to mitigate the potential impact of the new legislation, the details of which will be covered in a future article.
Briefly, equalising estates between partners, looking at your company structure if you trade via limited company, ensuring that your Wills are written in a tax efficient manner can, when used correctly, protect your business from the impact of IHT. Remember, it is not what your business is worth today that you should think about, the important question is what it might be worth in the future. Being proactive rather than reactive always achieves better results.
For more information, please contact a member of our Private Wealth Department, Rhea Rughani (TEP), Colin Glass or Vincenzo Mazzone.
The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.