When farmers protested in Westminster at the end of last year, many in the tax profession were already considering their other clients: entrepreneurs and family businesses who will be affected by the same issue as the farmers.
Business property relief has also been slashed to 50 per cent, like agricultural property relief, which means that shares held in trading businesses will no longer escape the full glare of inheritance tax when someone dies.
This means there will be a 20 per cent charge on death, on any shares in a business valued more than £1mn.
Jo Bateson, partner at Mercer & Hole, says: “It is a bigger thing [than the farmers]; it has a bigger impact.”
In 2021-22, the latest figures available, 1,730 estates applied for agricultural property relief and 4,170 for business property relief. Financially this equates to £1.5bn for APR and £2.85bn for BPR.
Anyone who has shares in a privately held trading business, or a stake in a family run business, and holds on to it until the time of their death, will find their estate being affected by a tax bill, on a holding above £1mn.
Bateson says: “Although it looks like a tax on individuals, it’s pretty much a tax on businesses. Where people have a valuable business, that’s most of their asset.
“If you look at the most recent data, and how many people claim BPR, a big portion of their estates is BPR property. Where are they going to get the money from?”
Hayden Bailey, partner and head of private client and tax at Boodle Hatfield, says: “The reason that a family businesses can keep going and stay in family ownership is that it can be resilient, and take a long-term view about paying dividends; but these businesses rely on the fact that they don’t have to find large amounts of inheritance tax on a shareholder’s death – an event outside of their control.
“UK family businesses that employ a significant number of people in well-known British brands, they don’t necessarily make super profits, because family businesses tend to reinvest in their business and its sustainability with a very long-term view.”
He adds that when the rules change in April next year, executors of deceased shareholders may even find they have to sell the deceased’s home to fund the tax charge. Alternatively, the company might have to borrow to buy back shares to fund the IHT charge.
50%
Business property relief has also been slashed to 50 per cent, like agricultural property relief.
Tim Stovold, partner at Moore Kingston Smith, points out that mitigations have been put in place to soften the blow.
“At the point that the business is transferring down to the next generation, a business worth £10mn is going to give rise to an IHT liability of £1.8mn [taking the £1mn cap into account].
“That £1.8mn can be paid over 10 years; £180,000 for the next 10 years, and that will be interest-free, which makes it more affordable, but that’s still quite a lot of money going out the door.”
“BPR is the relief that causes IHT to be reduced; BPR is the relief applied to business assets – the most common business asset is ownership of a business.
“You either own a business by owning shares in a business, or being a sole trader or via a partnership – the vast majority of businesses are run through limited companies.”
Planning steps available
Many tax professionals are now discussing with clients about what they should do, and what planning steps they can put into place, but there are no easy options.
Fundamentally, some may feel they do not want to take the money out of the business in the form of a dividend. The money may simply not be there, and very often is reinvested back into the family business, or the shareholders want to keep the business in the family so do not want to sell shares.
If this is the case, then the planning options are to make a lifetime transfer; take out a life insurance policy; or put the business into trust.
Stovold says that a whole-of-life policy that pays out on second death means the insurance company is taking a bet on who will die first in a couple, and how long the remaining partner will stay alive.
“With life insurance, everything can remain the same, mum and dad can go on and own the business; they’re paying a rather large amount towards an insurance policy, but the policy is significantly less than the IHT would be.”
While the uptake of life insurance is considerably low at present, he expects the life sector to be one of the big winners of the impending changes, when they come into effect.
The second option is to give away the business to one’s children during one’s lifetime, if they were set to inherit it anyway. This can be done tax free, as long as the donor survives the next seven years. A relatively cheap insurance policy can be taken out to cover that period, in case the donor does die within that timeframe.
Stovold says the drawback with this is that “people don’t like giving up control; dad likes owning it outright and there’s lots of conversations with children about loss of control”. It also means they will no longer be receiving dividends.
Bateson adds: “You don’t have control any more and the children might sell your business. We tend to say to clients that you do that alongside a family governance or shareholder agreement: you’ll all agree as a family you’ll never sell.”
If retaining control is important then the third option is putting the business into trust, where the parents can be trustees, and it stays outside the estate for IHT purposes.
Bateson says: “Trusts are brilliant family asset protection vehicles, and they’ve been around for a very long time. Over the past few years their tax benefits have been very limited, but the one big one they have is the IHT one.
“You swap a 40 per cent liability on death for a 6 per cent liability, reduced to 3 per cent on the assumption that trustees also qualify for the 50 per cent reduction in the tax rate for BPR, every 10 years. Most clients find that more palatable; it’s a known amount they can plan for and they know when to pay it, whereas you don’t know when you die.”
However, the person who has made the gift to the trust is excluded from benefiting from the trust, for it remain outside of the estate and the person must remain alive for seven years after gifting it to the trust.
The parents can still stay running the business, and take a salary from it, but will be unable to take a dividend from it.
Bailey says there are also tax implications if dividends from the business are used to pay the 10-yearly tax bill.
“Many companies are held in family trusts which pay IHT every 10 years. For a company to extract money to pay the IHT it will have to pay a dividend, which is generally taxed at 39.35 per cent, leading to double taxation.”
However, anyone contemplating this course of action needs to get moving.
Stovold says: “The trust must be put in place before April 2026, afterwards they become much more difficult to be put in place.”
There is currently an IHT entry charge when assets are transferred from individuals to the trusts regime, of 20 per cent, but shares in a trading company are exempt because of BPR. When the rules change in April 2026, the BPR is cut to 50 per cent, so there will now be a charge on the transfer into the trust.
“This means that there would be an entry charge when the trust is set up, which could be substantial,” says Stovold.
From the tax professionals’ perspective these changes to BPR amount to a huge impact on family run businesses, many of whom have no desire to sell out to a bigger cheque book and must find a way of coming up with some money to foot an IHT bill they have never envisaged having to pay.
Stovold says: “It’s a huge shock; the awareness around these changes is pretty low.”
Melanie Tringham is features editor at FT Adviser
