Owner Managed Businesses, IHT & Succession
Quite rightly, much of the attention and press relating to this month’s budget has focused on the increases to Employer’s National Insurance Contributions, individual pension pots falling within the scope of IHT, Capital Gains Tax increases and, with farmers and Jeremy Clarkson protesting at Downing Street, the changes to Agricultural Property Relief.
However, one fundamental change in the budget which has somewhat fallen under the radar is the reforms to Business Property Relief and the impact that these reforms will have for owners of private limited companies in the UK.
The majority of our business clients are owner-managed and/or family businesses and the succession plans for the owners of such businesses are often discussed and, in many cases, are a real concern for business owners.
The concerns are two-fold – from a personal / family perspective and the ongoing success of the business and protection of long-standing and dedicated employees.
The changes in the budget to the Business Property Relief and the impact that these changes will have on IHT liability for the estates of business owners will bring succession discussions and concerns to the forefront of a business owner’s agenda.
From 6 April 2026, the 100% IHT relief for business assets (including shares held in private limited companies) will apply only to the first £1 million of assets, with a reduced relief of 50% applying to any excess. This results in an effective rate of tax of 20% (on death) or 3% (on 10 year charges) on business assets with a value in excess of £1 million.
The impact of these changes could be fundamental for owner managed and family businesses.
In high level practical terms, it will mean that, on death of a shareholder, that shareholder’s shares will be valued and that value added to the total value of the deceased’s estate.
Inheritance Tax will then be paid on the total value of the estate (subject to conditions and exemptions) – the value of course being increased by the addition of the value of the deceased’s shares in the private limited company.
It is likely that this will result in a significantly higher Inheritance Tax bill for the deceased’s estate and accordingly will impact the viability of the business to continue in accordance with the deceased’s wishes.
The question then becomes, how will this significant tax liability be funded?
The shares clearly have a value but are not a free cash asset.
Will the estate have sufficient cash available from other funds to meet the payment (considering upcoming changes to pension rules and IHT payable on other assets)?
A legitimate fear is that that the IHT liability cannot be met, and the only option is a sale which, given the circumstances, would be in effect a fire sale with sellers being in a poor negotiating position.
Various options – both pre and post-death – have been discussed at the budget briefing seminars that we have attended in the last couple of weeks. None of the options mooted seem perfect at this stage.
Following the death of a shareholder, one option could perhaps be a buyback of shares by the company.
The issue is cashflow – does the company have sufficient profits and excess cash to fund the buyback, noting that CGT will be payable on the transfer and payments must be made immediately and cannot be deferred? Particularly where share values are well in excess of £1 million, this is unlikely.
Several options are available for owners as part of a wider IHT planning exercise.
A shareholder could take out a form of insurance to meet the expected tax bill.
There is clearly a cost impact to this and this may not be realistic or even possible for older owners or those with pre-existing health conditions.
Shares could be gifted now to children or other relevant individuals or to a trust established by the shareholder.
This may not be practical given the age and stage of children and trusts are not suitable for every situation and difficult to unwind. Various thresholds and conditions must also be met to qualify for exempt gifts (inc. 7 year rule).
One safeguard on a gift of shares to children or trusts could be that the shares gifted to children or trusts could initially only have capital rights and not voting rights, ensuring shareholders maintain practical control of the business.
This follows the Family Investment Company model that has become increasingly popular in recent years – such FICs however tend to be for the purpose of property investment and the model may not be appropriate for full trading businesses.
Growth shares could be issued to children or a trust now, crystalising the exposure to IHT to the value of shares at the date of issue. This would not eliminate the IHT charge on the share value to date of issue but would at least ensure that the IHT exposure is known and can be planned for.
The key here will be advance planning, as far as is possible, to ensure that IHT exemptions are utilised and/or IHT liability is limited as far as is possible.
Coordinated discussions with your solicitors, accountants, tax advisers and financial planners are essential.
The MCM corporate and private client departments are on hand to assist.
If you would like to meet or have a call, please contact:
Fraser Morrison (Head of Corporate) – fraser@mcmsolicitors.co.uk
Colm Kerr (Associate Director of Corporate) – colm@mcmsolicitors.co.uk
Maureen Matheson (Head of Private Client) – maureen@mcmsolicitors.co.uk
Legal waiver:
The information contained in this article is for general use is not intended to be comprehensive or a replacement for obtaining specific legal advice about your situation. Using the information without consulting us or another professional adviser is at your own risk. McKee Campbell Morrison Ltd accept no responsibility and gives no representations or warranties, express or implied, that any of the information and materials on this site is complete, accurate or free from errors or omissions.
