Succession planning considerations for family businesses ahead of Inheritance Tax (IHT) changes

Families need to act now by considering succession planning for family businesses ahead of the significant IHT changes announced by Rachel Reeves in last year’s Autumn Budget coming into force.

How will the IHT changes impact succession planning for family businesses?

From April 2026, business asset transfers exceeding £1 million will face an effective 20% IHT charge. While the first £1 million remains exempt, this change is set to have a major impact on family-run businesses.

A business relief currently allows owners to pass privately held companies down through generations without triggering IHT. That protection will no longer apply in the same way.

Which family businesses will feel the impact?

Thousands of family-run businesses in the UK – including manufacturers, retailers, care providers, veterinary practices, hospitality firms, and farmers – are likely to feel the effects of this reform. The introduction of Inheritance Tax on farms, in particular, could significantly affect agricultural families.

An example of how IHT changes could impact family businesses without succession planning

Looking at a practical example.

If someone inherited a £10 million business post April 2026, only £1 million will be fully tax-exempt. The remaining £9 million would then be taxed at 20%, creating a £1.8 million IHT liability.

If the business is the only asset, beneficiaries would most likely need to extract this amount from the company. Consideration would need to be given on how best to extract the funds, which could trigger Income Tax liabilities and potentially lead to double taxation.

Although the tax liability could be paid over a period of 10 years, this would require withdrawing an additional £180,000 net each year. If taxed as dividend income, this approach could push the total combined income tax and IHT liability to £3 million.

What can families do now to reduce the impact of the IHT changes?

One option is to start gifting qualifying assets during the owner’s lifetime. To fully escape IHT, the individual must survive seven years after the transfer, with taper relief applying after 3 years. Acting early gives families more flexibility and a better chance of reducing their overall tax exposure.

However, this may not be a viable option for some individuals who are elderly or in poor health and still hold their business assets. They may, therefore, be rightly concerned about whether they can hand over their business to the next generation, without triggering a significant tax liability.

Steps to consider

Business owners should consider taking proactive steps now. This includes reviewing life insurance policies to see if they would cover any potential IHT liabilities if the owner passes away within the next seven years. They could also look to gift shares in the business to family members sooner rather than later. And with the upcoming changes, it’s essential to revisit and update wills to reflect the new tax landscape.

The use of trusts when succession planning for family businesses

Each spouse will have a £1 million allowance, but it’s non-transferable and lost if unused on death. To make full use of this relief, both spouses should hold at least £1 million of qualifying assets. It will be crucial to secure the relief on the first death – either by passing assets directly to the next generation or placing them in trust. Trusts also offer a planning opportunity, as a new £1 million allowance becomes available every seven years.

However, many families may face a harsh reality: without careful planning, they could be forced to sell the business. For some, this could mean the end of a legacy that’s been passed down for generations.

Next steps

Draft legislation for the proposed changes is expected in Autumn 2025. Although there is still time for the Government to make a U-turn on the proposals, it is looking increasingly unlikely.

We would, therefore, recommend that all business owners seek out professional, tailored advice, if they haven’t already and start to plan their succession as early as possible.

Get in touch with one of our experts to find out more about how we get help you with IHT and succession planning.