By Fiona Graham, Chief Operating Officer
Recent press reports suggested that proposed changes to the taxation of company distributions could result in transfers of family businesses to the next generation being taxed as income.
Understandably, this caused considerable concern, particularly among businesses already dealing with the impact of changes to Business Property Relief.
Family Business UK acted quickly to raise members’ concerns directly with senior officials in HMRC and the Treasury, ensuring the potential consequences for family business succession were understood at the highest levels of Government. The Chancellor has since written directly to FBUK, confirming that the reforms are intended to protect genuine family business succession.
The documents published alongside the Budget provide further reassurance about what is, and is not, changing.
What is the Government proposing?
The Government plans to reform the tax rules covering distributions from companies to individual shareholders.
Its aim is to prevent arrangements that allow people to extract company profits at Capital Gains Tax rates where there has been no genuine change in the economic ownership of the business.
FBUK supports the creation of a clearer and more consistent framework, as well as proportionate action to address artificial arrangements. In our direct engagement with HMRC and the Treasury, we have been unequivocal that the reforms must distinguish between artificial capital extraction and genuine changes in the ownership of a family business.
The Government plans to consult on the technical detail in 2027, before introducing the new rules in April 2028.
Can parents still pass shares to their children?
Yes.
The Government has confirmed that parents will still be able to gift or sell shares in a family business to their children under the existing rules.
Where Gift Hold-Over Relief applies, any Capital Gains Tax can continue to be deferred until the child later disposes of the shares.
The reforms are therefore not a new general income tax on passing shares in a family business to the next generation.
The Government has also said that more complex transfers covered by the reforms will continue to receive capital treatment where there is a genuine change in ownership.
Why did FBUK intervene?
FBUK’s engagement has ensured that the practical realities of succession in multigenerational family businesses are part of the Government’s consideration of these reforms.
Succession in a family business is rarely a simple transfer from one person to another.
Ownership may be spread across different generations and family branches. Some shareholders may work in the business, while others may contribute through governance, investment, property or personal guarantees. Some may be preparing to take responsibility for the business, while others wish to retire or leave.
Family businesses often use purchases of their own shares to manage these changes. A company may buy shares to:
- enable a shareholder to retire;
- transfer ownership towards the next generation;
- buy out a family member who is no longer involved;
- consolidate ownership following an inheritance;
- manage changes between different family branches; or
- provide liquidity to an estate following a death.
These transactions involve a genuine change in ownership. They are fundamentally different from arrangements through which someone extracts accumulated profits while retaining substantially the same interest in the business.
Drawing on the experience of our members, FBUK warned Ministers and officials that rigid new conditions could unintentionally make ordinary family business succession more difficult and expensive.
What did FBUK ask the Government to address?
Our response focused particularly on purchases of a company’s own shares and demergers.
We raised concerns about proposals that could exclude shareholders with an interest of less than 5%. In a multigenerational business, ownership may be divided between siblings, cousins and different family branches, meaning a smaller shareholding can still be significant.
We also argued against making employment a general condition of relief. A shareholder may have inherited shares without working for the company, may have retired, or may hold shares through a trust or as a personal representative. In many cases, the purpose of the transaction is specifically to transfer ownership away from someone who is not involved in the business.
Our central recommendation was that the rules should distinguish genuine commercial changes in economic ownership from arrangements whose purpose is simply to extract accumulated profits at capital rates. A family connection should not, by itself, suggest that a transaction is artificial or designed to avoid tax.
Following FBUK’s representations, the Government has already indicated movement on several of the concerns we raised. In particular, it intends to relax the proposed requirement that a shareholder must have been an employee for the two years immediately before the sale. It has also acknowledged concerns over the proposed 5% minimum shareholding requirement and will consider that further through the technical consultation.
Phased succession and company-funded exits
FBUK also highlighted that family business succession is often gradual.
An outgoing owner may retain a limited interest or protective rights while responsibility passes to the next generation. A company may also be unable to fund the immediate purchase of all the outgoing shareholder’s shares without placing significant pressure on working capital.
We therefore asked the Government to allow genuine successions to be completed in stages, including through deferred payments. A genuine transfer should not lose capital treatment simply because the business cannot safely finance an immediate lump-sum buyout.
The Budget documents provide important reassurance on this point. The Government has recognised that holding-company structures can be used as part of legitimate family business succession, including where the company helps fund a retiring owner’s exit.
The Government has said that the changes to the purchase of own shares rules are intended to allow qualifying company-funded exits to be completed in stages, enabling ownership to pass in an orderly way while spreading the call on the company’s cash and distributable reserves.
This is a significant and welcome response to one of the important practical issues FBUK raised directly with the Government. It demonstrates the value of ensuring that Ministers and officials hear from family businesses before the detailed rules are finalised.
What happens following a death?
We also raised the position of a family business following the death of a shareholder.
An estate may hold valuable but illiquid shares for which there is no external market while facing an inheritance tax liability. A purchase of those shares by the company may be the only practical way of providing liquidity without selling or breaking up the underlying business.
If the money needed by the estate could only be extracted at income tax rates, substantially more cash might have to leave the company to meet the same liability. This would further reduce the money available for investment, employment and growth.
FBUK has asked for a clear route to capital treatment where a share purchase supports genuine estate administration and results in a real change in ownership. We have put this issue directly to HMRC and the Treasury and will continue pressing for it to be addressed through the technical consultation.
What happens next?
The Chancellor’s direct reassurance and the statements published alongside the Budget are welcome. However, the final legislation has not yet been published.
The Government will hold a technical consultation in 2027 to test how the proposed conditions work and whether adjustments are needed to protect genuine family business succession. Implementation is planned for April 2028.
FBUK will continue working directly with HMRC and the Treasury throughout the next stage of this process. We will bring Ministers and officials practical evidence from family-owned businesses, test the proposed rules against real succession scenarios, and hold the Government to the commitment given directly to FBUK by the Chancellor.
Our engagement has already helped secure important reassurance and movement on practical concerns. We will now use our influence throughout the technical consultation to ensure that commitment is translated into legislation that works for family businesses with different ownership structures and circumstances.
Our position is clear: the tax system should prevent artificial profit extraction, but it must not obstruct genuine succession, retirement, estate administration or changes in ownership between different branches of a family.
These reforms are separate from the inheritance tax changes affecting Business Property Relief. The reassurance on company distributions is positive, but it does not resolve the wider pressures those changes are creating. The full restoration of Business Property Relief remains FBUK’s number-one policy ask.
Want to find out more about the announcements in the Budget? Join our webinar on 5th November for a full rundown and expert analysis. Find out more: https://familybusinessuk.org/event/post-budget-webinar/