Updating business succession plans

Stuart Ritchie at Ritchie Phillips LLP asks: Do your succession plans need updating following the UK’s 2024 budget?

 

Succession planning hit the headlines following Chancellor of the Exchequer Rachel Reeves’ first Budget on 30 October 2024.  Radical changes to the rules for Inheritance Tax (“IHT”) led to the “Tractor Tax” protests in Westminster by the farming community.  But Reeves’ changes have a much wider implication for wealthy individuals who have their own privately held businesses.

 

The issue of when to pass on wealth to your heirs and successors, typically your children and grandchildren, is very much back in focus.  Many individuals worked on the basis that there was no IHT on their estates and therefore they could leave their succession plans to much later in life or even when they died.  This is no longer the case and the changes in the Budget will cause a re-evaluation of the options available.

 

There were two key changes: 

1. Limiting the 100% reliefs for business and agricultural property; and
2. Bringing the value of any unused pension funds within the scope of IHT on death, where the fund is not left to a surviving spouse. 

There was a further change, albeit with less impact, in that relief for the value of shares in AIM listed companies will be restricted to 50% from 6 April 2026.  The Chancellor realised that purchasing AIM listed shares, holding them for two years and then getting 100% IHT relief was an all-too-easy way to avoid IHT. 

 

Whilst portfolios of AIM listed shares are targeted at those in the final quarter of their lives, there are a number of entrepreneurs who have founded their own business and listed it on the AIM market to either fund, raise or create a market in their company’s shares, who may now be caught by this modified rule.

 

Business Property Relief, Agricultural Property Relief

The most controversial announcement by the Chancellor was the introduction of a £1 million arbitrary limit on the value of property qualifying for Business Property Relief (BPR) and Agricultural Property Relief (APR). Owners of a family business or agricultural estate may no longer be succeeded by other members of a family, typically a younger generation, with no IHT liability, if its value exceeds £1 million.  This will most likely be probable for a number of entrepreneurial families.

 

From 6 April 2026, the existing 100% rate of relief will only be available for the first £1 million of property qualifying for BPR and APR. Thereafter, the rate of relief will be 50% of the standard 40% IHT rate.  Such assets will therefore now bear an effective IHT rate of 20% of the value over £1 million.

 

The new rules will apply to lifetime transfers made after 30 October 2024 if the donor dies in the seven years following the gift and to lifetime gifts made before 30 October 2024 if the donor dies on or after 6 April 2026. The £1million limit is also individual and not transferrable to a surviving spouse, unlike your nil rate band for example.

 

This is dreadful news for many family-owned businesses and agricultural estates expecting to be succeeded by the next generation without an IHT liability. The imposition of IHT, even at the reduced 20% rate, will mean that a significant number of long-standing family-owned businesses and agricultural estates will have to be sold.

 

A possible solution is life assurance to protect against the risk of the IHT liability.  For an agricultural estate, this liability can be calculated with reasonable confidence as fluctuations in land values tend to be consistent over a period of years. In contrast, the value of a family-owned business can move through a wider range of value as profits increase and decline, reflecting the wider economy of factors specific to the business. 

 

Whilst a business valuation should be obtained to understand the potential IHT liability, this should be updated periodically to ascertain if the IHT liability has changed from any previous assessment.

 

There is a short reprieve before the new rules come into effect.  It is essential that those likely to be affected by these engage with their professional tax advisors now to try and mitigate the impact.  It may be that this reduced relief from IHT can be side stepped with sound tax planning or, if affordable, the increased IHT liability can be covered by life assurance.

 

Unused pension funds

Unused pension funds and death benefits payable from a pension were also the target of the Chancellor.  From 6 April 2027, they will be brought into a person’s estate for IHT purposes.  Unused pension funds typically arise where an individual saves for their retirement through either a SIPP – Self Invested Pension Plan - or a SSAS – Small Self Administered Pension Scheme. 

 

If you bought a pension annuity to provide you with a regular income in retirement, there will be no unused pension funds on your death.

 

The exemption between spouses and civil partners will apply avoiding an IHT tax charge on the first death of a couple.  But thereafter, regardless of whether you die before or after age 75, your unused pension fund will be subject to IHT.  And if you were over 75 years of age at death, any payments from your pension fund to your nominated beneficiaries will also be subject to income tax.

 

Owners of family-owned businesses tend to save for their retirement in pension funds which have an unused value on their passing.  The extension of IHT to unused pensions is therefore an unwelcome step on the part of Reeves.  The worry is that this may not be the only attack on pensions, and we shall have to see what comes next from the Chancellor.

 

Planning for the future

If you leave everything to be dealt with in your Will, then in all probability this will need updating, as will the level of life assurance cover you hold.  Alternatively, you may feel the time is right to consider lifetime giving for your family-owned business to your successors.  This will require an assessment of the current value of the business and consideration of the Capital Gains Tax and IHT costs of a lifetime gift.

 

Now is a good time to talk to your professional advisors to get their views on how these tax changes will affect your position.  They may after all have ideas on how to sidestep the new rules altogether! 

 

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Stuart Ritchie is an expert tax advisor with over 30 years of experience in the field. His new book, Who Will Get My Money When I Die?, unpacks the complex world of wills and Inheritance Tax

 

Main image courtesy of iStockPhoto.com and Andrii Dodonov