Everything family businesses should know ahead of Reeves’ tax changes
Rachel Reeves’ Budget has thrown up new obstacles for family businesses. Stephanie Parish tells you why you should plan ahead now
The 2024 Autumn Budget has ushered in a new era of evolving tax rules, presenting significant challenges and considerations for both individuals and organisations. Among those most affected are the UK’s 5.3m family-owned businesses.
Labour’s policy decisions have sparked controversy within the business community, with major figures such as Sir James Dyson publicly warning the government about the impact of Reeves’ tax regulations.
The particular worry is around the proposed changes suggested to be coming into effect from April 2026, which if not amended, will see valuable business relief against inheritance tax capped at £1m.
These headwinds and uncertainties have prompted many business owners to reevaluate their exit and succession strategies, with some accelerating their plans to exit and sell completely, while others seek ways to preserve their businesses for future generations.
A technical consultation on the changes to business relief has been promised by the government in early 2025. After which we shall await draft legislation to thoroughly review and understand the finer details.
But now the full scope of the Budget has been digested, what proactive steps should business owners be taking to prepare for these incoming changes?
Passing the torch without getting burned
Following the Budget, there are major changes in store for family-owned businesses that will result in an increase in the cost of doing business. As of April this year, companies will face an increase to employers’ national insurance and rising minimum wages, putting added pressure on their bottom line.
However, another key change announced in the Budget was to limit the availability of business relief. Business relief is an inheritance tax relief of up to 100 per cent on certain business interests, most typically shares in a trading company. Currently there is no cap on that relief. Therefore, if someone died owning a £5m shareholding in their company, if they satisfied the conditions for business relief, they could pass that shareholding onto the family without inheritance tax being due. Compare that to other assets which typically will be subject to inheritance tax at 40 per cent.
The proposed changes however will cap business relief after April 2026 to £1m for any single individual. For any value above this threshold, a 20 per cent inheritance tax liability will arise. In the example above, potentially a £800,000 inheritance tax liability (20 per cent of £4m).
With these changes to inheritance tax due to take effect from 6 April 2026, family-owned businesses will likely want to consider passing on the shares in their lifetime sooner than they may have anticipated. One thing the budget didn’t change was the usual “seven-year rule” for lifetime gifts. Therefore, leaving business interests to pass on death, assuming 100 per cent business relief can be claimed, may no longer be the most tax efficient plan.
Addressing succession challenges
Family businesses are the backbone of the UK economy, contributing £575bn annually to the UK economy. However, recent research from STEP (Society of Trust and Estate Practitioners) found that 69 per cent of family business owners admit they lack formal succession plans.
Business owners should review their succession planning strategy to ensure that their transfer of assets and wealth to future generations can be as efficient as possible under these new rules.
Seeking advice from trusted advisers sooner rather than later can help mitigate any challenges involved when transitioning ownership to the next generation.
One recurring issue involves current shareholders/founders being reluctant to relinquish control, fearing excessive influence (or a change in direction!) from the next generation. Struggling to ‘pass on the torch’ is a recurring challenge in succession planning.
It’s also particularly difficult to consider passing on ownership when the next generation is not yet involved in the day to day running of the business. There can also be a degree of nervousness if the next generation successor becomes divorced or bankrupt or wants to sell their shares, and the fallout that would follow.
On the other hand, there’s also pressure on the next generation receiving shares and questions around whether they even want to be involved in the business, to what extent and the family responsibility that comes along with it.
As the dilution of shareholdings between more family members can present a risk to the business, seeking legal and financial advice through the process is critical. Many of these worries can be addressed with good legal advice around wills, nuptial agreements, shareholder agreements and family constitutions.
Success in succession?
There is not a one size fits all solution to succession planning. Family businesses, especially, have unique properties to them and the only way to overcome these challenges is through open dialogues and not only seeking advice but taking it onboard.
Transitioning ownership to the next generation is a topic that has traditionally been ignored, until the death of the main shareholder. However, with the changes to relief for inheritance tax, owners have to consider this sooner and start having these conversations earlier if they want to potentially mitigate the inheritance tax changes on the horizon.
We’re already seeing our clients start to consider more regularly a ‘giving while living’ strategy, where they gift assets such as their business shares while they’re living and breathing.
Plan, don’t panic
You can sympathise with family-owned businesses. The Budget was a bombshell announcement, without any of the finer details – leaving business owners to panic.
It’s drawn outrage from the industry too, with Sir James Dyson stating Rachel Reeves is “killing the geese that lay the golden eggs”.
While the changes to IHT and business relief do not take effect until April 2026, planning ahead is recommended.
Family-owned businesses should turn to lawyers and tax and business advisors to seek advice on their specific circumstances and to help safeguard the business and its assets, and mitigate potential challenges posed by succession – or they may be left with egg on their face.
Stephanie Parish is a partner in private wealth at national law firm Clarion