Changes to inheritance tax (IHT) reliefs announced in the Budget have prompted many business owners to reassess their financial situation. Owners of family businesses, in particular, are being encouraged to put clear succession plans in place to protect their assets and wealth. The importance of this has been further highlighted by recent research by STEP, the Society of Trust and Estate Practitioners, which revealed that 69% of family business owners do not have a formal succession plan that outlines what will happen to their business after their death. Furthermore, only 32% of family business owners in the UK have an up-to-date will.
One of the challenges faced by family business owners is an often-subconscious reluctance to relinquish control; many entrepreneurs’ identities are closely linked to their businesses. However, for estate and succession planning to be effective, business owners may require a shift in mindset to ensure the business survives for future generations. Whether through lifetime gifting, trusts, or restructuring, the key to reducing the IHT burden is proactive and practical planning.
To navigate these challenges, family business owners need to consider a combination of strategies, including but not limited to lifetime gifting, the use of trusts, and reviewing the business structure. Each of these methods has a role to play in reducing IHT liabilities whilst ensuring the business remains resilient.
One of the most effective and practical tools in succession planning is lifetime gifting. By transferring assets during their lifetime, business owners can reduce the value of their estate and thereby potentially reduce IHT liabilities, whilst also ensuring continuity and control. Under current rules, assets that are gifted and survive for at least seven years are exempt from IHT.
For family businesses, this may involve transferring shares, business property, or intellectual property to family members or trusts. In addition, the early transfer of assets allows business owners to take advantage of reliefs such as Business Relief (BR), which can significantly reduce IHT exposure. Married couples or civil partners can also maximise these reliefs by ensuring that business assets are jointly owned, allowing the surviving spouse to benefit from the reliefs available on half of the inherited assets.
Another powerful estate planning strategy is the use of trusts. Trusts allow family business owners to maintain control over the business whilst ensuring that assets are transferred according to their wishes. By placing shares or business assets into a trust, the owner can designate trusted family members as potential beneficiaries while still maintaining oversight and control over the asset distribution.
Business owners can structure trusts to ensure that the next generation gains access to the business only after meeting certain conditions, such as reaching a certain age or completing business training, to ensure the company remains in capable hands. Moreover, trusts can provide a level of protection against future tax changes, helping to future-proof business and family wealth.
Succession planning isn’t just about transferring assets; it’s also about how the business is structured for future generations. This may involve setting up structures like family investment companies or partnerships or companies, with clear voting provisions that ensure control remains within the family. Another option is establishing governance mechanisms, like family councils, to ensure that decision-making power stays with family members who share the same values and vision for the business.
With the right planning, family business owners can mitigate IHT liabilities, avoid family disputes, and ensure that their business thrives for generations to come. The key is to start the conversation as early as possible, seek professional advice, and establish up to date will and succession plans that will secure your family’s financial and emotional futures and wealth, as well as those of your business.
At Lodders, we understand the unique challenges that family businesses face. We work alongside you and your advisers to structure your affairs in the most effective way for your businesses and families. Whether you are looking to pass on your business to the next generation or ensure a smooth transition of assets, our team of expert solicitors can provide tailored solutions to meet your needs. For help and advice, please do get in touch.
This article first appeared in Birmingham Business, January/February 2025 issue.
Contact usFor help with succession planning in your family business please do get in touch with Michelle.