Succession planning for business owners

In this article, Lodders’ Dawn Oliver, partner in the Private Client team and Bradley Quin, partner in the firm’s Business Services Group explain the key changes for businesses unveiled in the Budget and the importance of early succession planning.

On 30 October 2024, Chancellor Rachel Reeves unveiled Labour’s first Budget in over 14 years, with a number of measures announced that will impact businesses and individuals. The Chancellor says the measures set out in the Budget aim to ‘restore economic stability’ and will help rebuild Britain by boosting public investment by over £100bn over the next five years.

Some of these changes will come as shock to business owners, many of whom will be heavily impacted by the £40bn worth of tax rises announced. However, with change comes opportunity and through early, judicious planning, there are ways businesses can structure their affairs to mitigate the impact of the changes and preserve business continuity across the generations.

Key changes for businesses

As well as the notable increase in employers’ National Insurance contributions, from 13.8% to 15% from April 2025 and the very significant reduction in the threshold at which its payable (from £9100 to £5000), the government announced a significant reduction in Business Relief (BR, formerly known as Business Property Relief) and Agricultural Property Relief (APR). In a major shift impacting many family-owned businesses and farms, 100% relief will be restricted to the first £1m and thereafter assets over £1m will get 50% relief, with an effective rate of inheritance tax (IHT) at 20%.

The measures, which will take effect from 6 April 2026, will apply not only to charges on individuals’ deaths but also affect lifetime transfers into trusts or gifts to individuals, where the donor does not survive for 7 years, in addition to decennial and other charges for relevant property trusts. According to the government, the changes are not expected to affect almost three quarters of estates claiming Agricultural Property Relief and the majority of estates claiming Business Relief in 2026 and 2027. Specifically, the reforms are expected to affect around 2000 estates each year from 2026 to 2027. These figures are being challenged by bodies representing those affected (such as the NFU), which contend that far more families will feel the impact. It is important therefore that all businesses likely to be affected take prompt action to ensure they are not included in these statistics. Another change for business owners is the increase in Capital Gains Tax from 20% to 24% for higher rate taxpayers and from 10% to 18% for basic rate taxpayers. Some commentators feel that the modest rise in Capital Gains Tax is the first of further rises.

The Capital Gains Tax rate under Business Asset Disposal Relief (BADR, formerly Entrepreneurs’ Relief), will remain at 10% this year, rising to 14% from April 2025 and 18% in 2026. The measure means that business owners with plans to sell may look to do this sooner rather than later, before the tax rate under BADR almost doubles by 2027. It is crucial, however, that business owners do not rush into the sale of a business. Specialist legal advice and support is essential from the due diligence stage, right the way through to completion.

Succession planning opportunities

In light of the changes announced, businesses will need to prioritise succession planning, particularly for assets exceeding £1m, by considering transfers to the next generation at least 7 years before death to maximise inheritance tax efficiency, rather than relying on passing assets via a will.

Evaluating partnership and company structures may also facilitate a smooth transition of equity in the business, whilst preserving some level of control and potentially, income, for the parents through appropriate share structures.

For married couples, there may be the option to restructure wills to ensure that assets qualifying for APR or BR on the first death pass directly to the next generation rather than to the surviving spouse, thereby minimising the value held in the latter’s estate. Equalising business assets between spouses may also help secure relief on the first death and maximise the overall available reliefs. Indeed, never has the equalisation of estates between a married couple been more important, even in cases where the spouse is not working in the business.

Moreover, lifetime gifts or trusts are likely to be at the forefront of tax planning going forward. Gifting business assets during your lifetime may offer an effective vehicle for transferring them to the next generation in a tax-efficient manner, whilst ensuring continuity and control. An alternative to family trusts is Family Investment Companies (FICs). These are private limited companies established with the purpose of managing family wealth and are emerging as a popular inheritance tax planning strategy amongst high-net-worth families.

Early is better

Whilst we await the finer detail of the new announcements, the main takeaway is that businesses need to consider succession and estate planning earlier than ever before, with a greater focus on lifetime planning rather than a reliance on transferring assets via wills. The Budget certainly brings challenges for business owners and will require re-evaluation of existing estate and succession plans. However, with appropriate preparation at an early stage, many of the potential inheritance tax liabilities can be managed and mitigated in such a way as to reduce the overall liability. Indeed, there are structures that can be utilised, and Lodders can work alongside your existing tax adviser to structure your affairs in the most effective way for you, your family, and your business.

It is important that businesses seek specialist legal advice when undertaking planning for the future. For help and advice, get in touch with our friendly team of expert solicitors today.