How the proposed changes to inheritance tax will affect business owners

How the proposed changes to inheritance tax will affect business owners

Inheritance Tax (IHT) has long been a concern for business owners looking to pass on their wealth, and recent proposals to reform the system are set to impact how family-run businesses and other enterprises are managed in the future. Starting in 2026, several changes are expected that will tighten the rules on IHT relief for agricultural and business assets. These proposed changes could have significant implications for business owners and their plans for succession.

What’s Changing?
One of the key changes is the restriction of the reliefs currently available under the Business Property Relief (BPR) and Agricultural Property Relief (APR) schemes. These reliefs allow business owners to pass on their business property or agricultural assets without incurring IHT. However, under the proposed reforms, the government will apply stricter criteria to these exemptions. Businesses that don't meet certain requirements will no longer qualify for full relief, leading to higher tax liabilities for those affected.

Another major shift is that pension pots, which have previously been excluded from IHT, will be included starting in 2027. This means that for business owners with significant pension savings, there could be a substantial tax bill once they pass away, as pensions will now count as part of the estate for IHT purposes.

How will these changes affect business owners?

• Planning for Succession: Business owners running family businesses will face higher IHT costs when passing their business to the next generation. This could make succession planning more complex and expensive, especially for those relying on BPR or APR reliefs to minimise the tax burden. Without these reliefs, the estate may need to be liquidated or sold off to pay the IHT, which could jeopardise the business's future.

• Reevaluating Business Structures: With these changes, business owners might need to restructure their businesses or explore new ways of transferring ownership to reduce IHT exposure. This could involve shifting ownership into trusts, revising shareholder agreements, or looking at ways to bring in external investors, all of which could help preserve the business in the face of higher tax bills.

• Pension Planning: The inclusion of pensions in IHT calculations from 2027 will also require business owners to reconsider their pension planning strategies. For those who have accumulated substantial pension pots, the tax implications could be significant. Business owners will need to seek advice on how best to manage their pensions in light of these changes, potentially by making gifts, using trusts, or adjusting their retirement plans.

What Can Business Owners Do to Prepare?

• Review Estate Plans Early: Business owners should start reviewing their estate planning strategies well in advance. It's important to understand how the new rules will affect your current arrangements and make adjustments where necessary. This could involve moving assets into more tax-efficient structures, such as trusts, or looking into lifetime gifting options.

• Take Advantage of Current Reliefs: While the reforms won't come into effect until 2026, there’s still time to take full advantage of existing reliefs. This may involve transferring assets or restructuring the business in a way that ensures maximum benefit from the current IHT exemptions before the rules change.

• Consider Diversification: Another approach to minimise IHT liabilities is to diversify the assets in the business and personal portfolio. For example, investing in assets that are not affected by the changes could provide a way to reduce overall tax exposure.

• Get Professional Advice: The complexities of IHT planning mean that seeking professional advice is crucial. A qualified accountant or financial planner can help navigate the changes, offering strategies to minimise the impact on your estate. Whether it’s adjusting business structures or revising pension plans, expert guidance can make all the difference.

Conclusion
The proposed changes to Inheritance Tax will undoubtedly have a significant impact on UK business owners, particularly those with family-run businesses or substantial pension pots. The next few years are crucial for reviewing estate planning and preparing for these changes. By taking action early and seeking expert advice, business owners can ensure their wealth and businesses are protected, allowing them to pass on a legacy while minimising IHT liabilities.

If you’re unsure how these changes could affect your business, now is the time to start planning. Get in touch with us today to explore the best strategies for your specific circumstances and ensure a smoother transition to the next generation.