To date, planning to manage their inheritance tax (IHT) position has not been a priority for many shareholders. This is understandable given the availability of Business Property Relief (BPR), which has meant that most shares in unquoted trading companies could be inherited without any IHT liability arising. Impending restrictions to BPR announced in the last Budget mean that shareholder succession planning now needs to be a priority – not only to manage tax risk for shareholders themselves, but also to manage future risk for their business which may be called upon to fund significant unforeseen IHT liabilities.
For many years, tax legislation has operated with a certain generosity towards entrepreneurs passing on trading company shares, either during their lifetime or on death. In its current form, BPR enables most unquoted trading company shares to be passed on to future generations with 100% relief from IHT.
By way of an example, if an individual owns 100% of shares in a trading company, worth say £30 million, and the remainder of their estate is valued at £5 million, with no planning, this person could leave the shares in the company to their children free from IHT subject to the company meeting certain qualifying conditions.
The entire £35 million estate of this person would be subject to an estimated IHT liability of £1.74 million which could be settled from the £5 million assets held outside the company, with no need for the business to contribute to funding. The IHT exposure could reasonably be considered not to be a business issue in these circumstances.
Two key IHT measures were announced in the Budget which will have a significant impact on both shareholders and, in many instances, their businesses:
1. After 5 April 2026, 100% BPR will be capped to the first, combined, £1 million of value held by the deceased and the relief will be decreased to 50% thereafter. This same £1 million allowance also applies to agricultural property relief (APR) which has attracted much more media attention in relation to the impact on the farming community
2. AIM shares will also be limited to 50% BPR but the £1 million allowance won't apply
The Government also included rules to prevent forestalling. This means that if gifts of shares are made on or after 30 October 2024 and if the donor dies on or after 6 April 2026 but within seven years of making the gift, the new restrictions will apply to any value assessed to IHT in their estate.
Taking the example above, instead of receiving BPR of 100% on the £30 million of shares, the estate would only get 100% relief on the first £1 million. The remaining £29 million of value will attract BPR at 50%, meaning an effective rate of 20% IHT applies (50% of the main 40% rate).
This increases the estate’s overall IHT liability under the new rules from £1.74 million to £7.54 million.
Clearly this additional £5.8 million will need to be funded and in this example, there are only £5 million total assets outside the trading company, so even if the family’s inheritance is depleted to nil (likely involving the sale of a family home) the business will probably be called upon to contribute.
This extra burden has the potential to bring about cash flow concerns for many businesses as most won't be in a position to simply part with such significant sums without disruption to their trade. It's also important to note that any amounts distributed to shareholders to pay IHT will still be subject to income tax. In the example above, a dividend in excess of £9.5 million would be required to settle the IHT immediately.
IHT is usually due by the end of the sixth month following a death. However, IHT attributable to the value of shares which qualify for BPR can often be settled in 10 annual, interest free, instalments. While the instalment option doesn’t lessen the potential burden on businesses to fund the tax, it can spread the risk so understanding whether shareholders qualify for the instalment option will be important to understand. It should not be assumed that the interest free instalment option will be available to all as various conditions must be met, which can be trickier for minority shareholders.
With the right planning, a managed succession strategy can significantly mitigate the risks arising from the new BPR regime. Succession is however a big issue which can take time and energy to address, so accelerating conversations about the future of the business is key. Considering shareholders’ options and taking the right advice before the new rules apply from 6 April 2026 is important, as certain mitigation opportunities may not be available after that date.
For more insight or guidance get in touch with Rachel Stace.
