Should I gift, sell, or restructure my business plan around Inheritance Tax rules?

Previously, there was no cap on the value of assets that could qualify for 100% BR or Agricultural Relief (AR), which is a similar relief available for certain farming assets.

However, in the 2024 Autumn Budget, Rachel Reeves announced a significant change: the introduction of a combined cap on the value of assets eligible for 100% BR and AR, to take effect from April 2026.

The limit was initially set at £1 million and was to be non-transferable between spouses or civil partners. This was later revised, and the threshold was increased to £2.5 million and made transferable, meaning couples may be able to pass on up to £5 million of qualifying assets with full relief.

Any qualifying assets above this threshold will receive 50% IHT relief instead.

While this is a significant revision, you still need to revisit your plan if your business is worth more than the limit, as it could lead to a higher IHT bill on your estate. So, it might be necessary to explore alternative strategies to preserve the business and your family wealth.

One option for tax-efficiently passing your business to your family is to gift it during your lifetime. This involves transferring business shares or assets while you’re still alive, rather than waiting to pass them on through your estate.

If you survive for seven years after making the gift, it will usually fall outside of your estate for IHT purposes. You may also be able to claim hold-over relief, which defers Capital Gains Tax (CGT) until the recipient sells the asset.

However, gifting isn’t without its challenges.

For example, if you don’t survive seven years after making the gift, some or all of the value could still be included in your estate for IHT purposes.

Moreover, once you’ve transferred the shares, you might no longer have the same level of influence over how the business is run, and your income could be affected if you rely on dividends.

Gifting can be an effective way of passing on your business tax-efficiently, but it needs to be done carefully. An independent financial planner can help you create a gifting strategy that supports both your financial needs and the long-term future of the business.

Selling your business can provide certainty over exactly how much you pass on, which can make estate planning simpler. It can give you more flexibility and control, as you can choose the timing of the sale and negotiate the terms, rather than leaving those decisions to your successors.

However, a sale could also have several tax implications that are important to consider before proceeding.

For instance, when you sell your business, you’ll no longer qualify for BR, unless you reinvest the money into other eligible assets. This would mean that a considerable portion of your wealth that would otherwise have passed on IHT-free could now be liable. A sale would also usually trigger CGT, which could be significant depending on the size of the gain.

Selling your business could be a good option if you’re happy for it to no longer be within your family and you’ve planned for the relevant tax outcomes. It’s also important to consider your plan for how to use the proceeds once the sale is complete, to ensure you manage them effectively.

Restructuring your business is a more gradual approach to succession. It might involve reviewing your share structure, introducing family members to the board, or using trusts to hold certain assets.

One of the key advantages of this approach is that you can keep a level of control while still taking steps to improve tax efficiency. For example, you might be able to use trusts to pass on business assets to the next generation, while maintaining control over how and when they’re accessed.

Gradually involving family members in decision-making can also make the transition smoother and, in some cases, could help preserve BR if structured properly.

The main challenge with restructuring is complexity, and it needs to be approached carefully to make sure you avoid unintended consequences. This typically involves a financial planner, solicitor, and accountant working together to ensure you balance tax efficiency with long-term succession planning.

The right approach for managing the changes to BR will depend on a range of factors, such as your time horizon, income needs, existing succession plans, and long-term goals. The key is to be on top of the changes and to ensure you’ve factored them into your planning.

This is where an Amber River financial planner can help. By modelling the different scenarios, they can show how gifting, selling, or restructuring could play out over time in the context of the new rules and your wider plan.

There isn’t a one-size-fits-all answer, but there is a right answer for you and your circumstances, and a financial planner can help you find it and then create a plan to ensure you execute it effectively.