There was much speculation ahead of the Budget about further changes to inheritance tax (IHT), with growing pressure on the Government from family businesses for them to row back on the IHT reforms that are set to come into force in April 2026.
Under changes announced in the last Autumn Budget (which seems so long ago now!), the IHT relief available for assets qualifying for Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped from April 2026, with the first £1 million of qualifying assets exempt from IHT. The excess will attract 50% relief, in effect producing a 20% tax rate.
This was a huge blow to entrepreneurs, family business owners and farmers - where previously their farm or business would have been completely free of IHT, they now face significant tax and a question over how to pay it. By way of example, a shareholder owning a business worth £10 million would potentially face an IHT bill of £3.6 million, up from zero if they die before April 2026!
Draft legislation published in July 2025 confirmed that the £1 million allowance wouldn't be transferable, unlike the unused nil-rate band and residential nil-rate band IHT allowances which can be transferred to a spouse or civil partner's estate when they die. In a rare note of positive news from the budget, that has now changed. Although IHT was generally conspicuous by its absence in the budget, the £1 million allowance for BPR and APR will now be transferable between spouses and civil partners on death, where it would otherwise go unused. That was an easy but very welcome change for the government to make.
The budget did, however, dampen any last hope of a u-turn on changes that will have a seismic impact on family businesses from next year.
There will be some relief amongst many that feared changes around rates, rules on timing for gifts or lifetime caps, as well as other reliefs such as surplus income exemption, were not announced.
The big headlines were around the new "high value council tax surcharge". That is a new maximum annual charge of £7,500 for a property worth more than £5m - a rate of only 0.15%, so it could have been worse, but it will make things difficult for those who are asset rich but cash poor.
And we did see an income tax increase - tax rates on dividend, property and savings income are to increase by 2%, meaning a highest rate of 47% for certain types of income, again cutting into the return on property investments that many landlords are facing.
Great wealth transfer
We are, apparently, living through the ‘great wealth transfer', where trillions across the globe is being transferred down the generations. However, the tax policies and plans of government are arguably stifling (or trying to take advantage of!) that movement through changes to tax.
Unsurprisingly, the changes to IHT in particular are provoking a great deal of conversations and thinking about succession issues and estate planning - both around family businesses and their ownership and management but also with a view to tax mitigation.
Each family is different (as Tolstoy wrote, all happy families are alike; each unhappy family is unhappy in its own way), but the dynamics are often the same or similar. There is a need to balance succession, tax, control and asset protection. Basically, how comfortable are the founders with giving valuable assets outright to the children? How concerned are they, or should they be, with asset preservation and divorce risk, for example?
Succeeding in succession
Trusts or family investment companies are often used as mechanisms to move value out of the older generation's estate while not necessarily passing over total control and value to the younger generation. Trusts, in particular, offer a great deal of control, discretion and flexibility, so they can adapt to changing family circumstances over time. In some cases, a long-lasting or dynastic trust might be helpful - something for future generations.
A family investment company is also an excellent vehicle at holding family wealth while splitting economic value but retaining control, to an extent, in the hands of the founders. As a company, there is a great deal of flexibility and the structure will be familiar to business owners.
When tensions rise
When it comes to succession, the points of dispute are often around equality - for example, if one child is involved in the business, should they ultimately get a larger share of the family wealth via that business? Have they played a part in its success? What does fairness or equality look like in this scenario - again, the answer will differ between businesses and indeed families.
Similarly, there will often be children from previous and current relationships - how should they be catered for? How should Wills deal with spouses and civil partners as well as protecting wealth for (or from!) children?
In relation to the transfer of family business shares down the generations, there is certainly a lot more use of pre-nuptial and post-nuptial agreements, which can be incredibly useful at helping to carve out family wealth and try and protect it from any divorce in future.
Family charters are also helpful - these are not legally binding documents, but they can clearly set out for the wider family how the family business and wider wealth should be used and managed over time. They can address issues like dividend payments, succession, management, control, charitable giving and so on. Is the family wealth there to fund a lavish lifestyle for the children or grandchildren or should it be used to provide more subtle support during their own lives and careers? In addition, family charters are very useful at prompting (often lively) discussions in the family.
Clear communication
Ultimately, when it comes to succession, open dialogue is key. Having potentially difficult discussions during your lifetime is much more preferable to your family dealing with surprises or disputes after death (or their advisers having to explain it to them!).
The most effective way to avoid family disputes and create a clear pathway for the future success of a business is to plan early and plan well. Clear governance, asset protection structures like trusts and companies and independent advice create certainty and reduce emotional friction.
When families treat succession and inheritance as strategic priorities rather than last-minute decisions, or a knee-jerk reaction to the Budget, they protect both their wealth and their relationships.
For further information please visit Mills & Reeve LLP
