Inheritance tax changes and UK entrepreneurs

Emma Florentin-Lee at Oury Clark considers the impact of upcoming inheritance tax changes on UK business owners

 

One of the many changes announced in Chancellor Reeves’ Budget, is a shift in the current inheritance tax (IHT) structure. As part of a broader tax reform aimed at raising £40 billion, from April 2026, individuals will be subject to increased IHT when passing on assets. This has understandably raised concerns among family business owners in the UK.

 

In particular, there are anxieties surrounding how these changes will affect family-owned businesses and those inheriting them. 

 

But what do the changes actually mean for UK businesses? And how should we be bracing for them?

The Budget’s main change to IHT focuses on capping Business Property Relief (BPR). Previously, BPR allowed qualifying business assets to be passed on without incurring tax, supporting family businesses’. Under the new regulation, full relief will apply only to the first £1 million of qualifying assets. Any value beyond this will be subject to only 50% relief.

 

For example, if an individual passes away with a business valued at £2 million, assuming the business qualifies for BPR, IHT of approximately £200,000 would be due. This is assuming their Nil Rate Band is used against other assets left in their estate and that the estate is not being passed to a spouse.

 

There are a range of implications that come with increasing IHT for family-owned businesses. For example, the executors may need to sell off significant assets to cover the tax burden—this includes being forced to liquidate parts of the business. This will disrupt businesses, and down the line, could even threaten the viability of family businesses being passed down generations. 

 

In addition, in order to pay IHT, some may resort to extracting cash out of their businesses. However, even if there is cash within the business, extracting it to pay the IHT will likely trigger income tax, adding to the financial strain.

 

So, what can businesses do to prepare? Initially, it’s imperative business owners reassess their IHT planning strategies, as they may no longer be the best option. Consulting with tax and legal advisors to explore how to best update your strategy is advisable.

 

There are also a few practical options available. For example, you could consider lifetime gifting. This includes transferring ownership of business assets during your lifetime (beware, this comes with its own tax implications!). 

 

In addition, taking out life insurance policies to cover any IHT potentially due, will ensure beneficiaries can inherit the business and continue to trade without the estate having to find the cash to pay IHT. Lastly, if business assets are jointly owned, it’s important to consider some joint ownership planning as part of your IHT strategy to ensure it makes use of both individuals’ £1m BPR limit.

 

Aside from this, it’s also important to consider the potential long-term consequences on the economy as a result of an increase in IHT. It’s clear that businesses that are asset-rich but cash-poor will be hit hardest, as executors may struggle to find liquid assets to cover the IHT without effecting the business growth.

 

There are also concerns an increase in IHT, alongside other tax increases announced in the Budget, could lead to wealthy individuals leaving the UK to reduce their tax burden. This would result in a loss of investment and entrepreneurial talent, ultimately weakening the UK’s economy and growth.

 

Closer to home, the increased burden of IHT could also limit the capital available for reinvestment in the UK. This will hinder the ability for family businesses to continue trading effectively, potentially stifling growth.

 

It’s clear the upcoming changes to IHT mark a significant shift for family businesses in the UK. To prepare, it’s important business owners take proactive steps to reassess and update their succession and tax strategies to mitigate the potential negative effects we have discussed. 

 

With thorough planning and informed decision-making, business owners can better navigate the changes to IHT and other tax increases to ensure their interests and assets are protected, despite the shifting political landscape.

 

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Emma Florentin-Lee is a Partner at Oury Clark 

 

Main image courtesy of iStockPhoto.com and clubfoto