19.11.2024 | Tax

When Chancellor Rachel Reeves announced changes to inheritance tax relief in her recent Budget, media attention focused on farmers. However, there’s a hidden story that affects thousands of business owners across Britain, including those in the port and logistics sector who intend to pass their businesses down to their children. Andrew Diver, Head of Tax at Beatons accountancy firm, explains more.

The dust has not settled after the Autumn Budget announcements because many businesses are still grappling with what it means for them.

This is especially true for those who have built a business they intend to pass on to their children as a legacy.

After all, starting April 2026, business owners face a significant shift in how their inheritance is taxed.

Previously, family businesses could pass down their enterprises largely tax-free. But now, only the first £1 million will receive full protection, with larger businesses facing new tax burdens that could force difficult choices.

A real-world example

Picture this: Sarah and James have spent 30 years building their sea freight and customs management business, now worth £5 million.

They live in a comfortable family home worth £650,000. Under current rules, they could pass everything to their three children without inheritance tax.

But from 2026, their family could face an £800,000 tax bill.

The hidden catch

Here’s where it gets tricky. To pay this tax bill, families might need to:

• Sell the family home
• Liquidate business shares
• Take large dividends from the business (triggering additional tax)

While HMRC offers a 10-year payment plan, interest charges make this an expensive option.

So what can you do?

Don’t panic—there are ways to protect your family’s legacy, and some professional financial planning would be beneficial here.

Options include:

• Strategic lifetime gifting

Generally, gifts made more than seven years before your passing will usually fall outside your Estate and, therefore, be exempt from inheritance tax. However, if you pass away within seven years of making the gift, this may result in the gift attracting inheritance tax, with a sliding scale of tax relief applied based on how many years have passed since the gift was ultimately made.

• Smart use of family trusts

A trust is a legal arrangement in which you transfer the ownership of assets into a trust to hold on behalf of the trust’s beneficiaries.   The donor cannot benefit from the trust assets, but they can continue to control them if they are also named as a trustee.   Once assigned to a trust, assets are safeguarded from creditors and legal challenges and will be outside your estate after seven years.

• Reviewing existing wills, especially between spouses

Crafting a will is a crucial part of inheritance tax planning.  Spouses should also consider whether the mirror wills leaving all assets to each other are now IHT efficient where assets eligible for Business Relief are held.

• Early planning for business succession

At the heart of any long-term planning should be succession—the process of transitioning management and ownership of your business to the next generation. If you aim to pass on your enterprise to your family, you can involve your children in the business as soon as possible.

If you would like to discuss how these changes will affect you, please contact Beatons on 01473659777 or email info@beatons.co.uk