Passing on Your Family Business: A Guide to Inheritance Tax

For many entrepreneurs, a family business is more than just an asset; it’s a lifetime’s work and a legacy for future generations. However, without strategic planning, Inheritance Tax (IHT) can present a formidable obstacle, potentially forcing the sale or breakup of the business you’ve built. This guide offers professional insights into navigating the complexities of IHT, ensuring your business legacy is protected.

The Cornerstone of IHT Planning: Business Relief

Business Relief (BR) is a important IHT relief specifically designed to enable family businesses to be passed down through generations.

How Business Relief Works

• 100% Relief: For many businesses, BR offers 100% relief from IHT. This typically applies to an interest in a business, such as a sole tradership or a partnership, and shares in an unlisted company.
• 50% Relief: In some cases, the relief is 50%. This may apply to shares controlling more than 50% of a listed company, or to land, buildings, or machinery used primarily in the business.

To qualify, the business must have been owned for at least two years and must be a trading entity, not one primarily engaged in investment activities like property development or share trading. It’s also crucial to be aware of “excepted assets”—assets not used wholly or mainly for business purposes, such as large cash surpluses—which may not qualify for relief.

Valuing Your Business Accurately

A precise and defensible valuation is fundamental to any IHT plan. HMRC scrutinises valuations closely, so engaging a professional is not just recommended, it’s essential. Common valuation methods include:

• Discounted Cash Flow (DCF): Projects future cash flows to determine current value.
• Net Asset Value (NAV): Best for asset-heavy businesses.
• Earnings Multiples: Applies a multiplier to the business’s profits.

A chartered surveyor or accountant specialising in business valuations can provide the necessary expertise and documentation to withstand HMRC scrutiny.

Succession Planning: Beyond the Family

A robust succession plan is about more than just minimising tax; it’s about ensuring the business continues to thrive.

Traditional Family Succession

• Gifting Shares: Transferring shares during your lifetime can be an effective way to reduce your estate’s value. However, these gifts are considered “Potentially Exempt Transfers” (PETs) and are only fully exempt from IHT if you survive for seven years after making the gift.
• Family Investment Companies (FICs): These are an increasingly popular tool for managing family wealth and passing assets to the next generation in a controlled manner.
• Trusts: A trust can provide flexibility in managing business assets, particularly if beneficiaries are young or if you wish to retain a degree of control.

A Modern Approach: The Employee Ownership Trust (EOT)

A powerful alternative to a traditional family succession is transferring the business to an Employee Ownership Trust (EOT). This involves selling a controlling stake (more than 50%) of the company to a trust which acts for the benefit of all employees.

This route offers significant tax advantages:

• For the Owner: The sale of shares to an EOT is entirely free from Capital Gains Tax (CGT).
• For the Business: Once the company is employee-owned, it can pay annual tax-free bonuses to its staff.
• For IHT: The transfer to the EOT is also free from Inheritance Tax.

EOTs can be a fantastic way to secure the future of the business, incentivise your workforce, and achieve a tax-efficient exit.

Essential Steps for Every Business Owner

1. Review Your Business Structure: Proactively ensure your business qualifies for Business Relief and identify any non-qualifying assets.
2. Get Regular Valuations: An up-to-date valuation is crucial for planning.
3. Develop a Succession Plan: Whether it involves family, employees, or a third-party sale, a clear plan is vital.
4. Explore Gifting and Trusts: Understand the rules and benefits of these established IHT planning tools.
5. Consider Life Insurance: A policy written in trust can provide a lump sum to cover any IHT liability without impacting the business.
6. Keep Meticulous Records: Document all business transactions, valuations, and gifts.
7. Seek Professional Advice: The landscape of IHT is complex. A specialist solicitor, accountant, or financial advisor is indispensable.

Looking Ahead: The Future of Business Relief

The rules surrounding Inheritance Tax are not static. There is speculation that Business Relief may be subject to changes as early as 2026. While nothing is confirmed, this possibility underscores the importance of proactive and regular reviews of your estate planning. Staying informed and agile is the best defence against future legislative shifts.

By taking a strategic and well-advised approach, you can successfully navigate the challenges of Inheritance Tax and ensure the enduring legacy of your family business.