Overview
The Government has used the Budget to introduce changes to the Inheritance Tax regime. Specifically, it is changing how Business Property Relief (BPR) and Agricultural Property Relief (APR) will be applied to family-owned enterprises. These changes will have an enormous impact on family-owned business and farms across the UK and will be particularly felt by multi-generational businesses in long-term ownership.
The changes will also affect BPR applied to shares listed on AIM.
The changes will take effect from April 2026.
Family Business UK View
There are 4.8 million family businesses in the UK employing 13.9 million people and contributing more than £200 billion a year in taxes to the Exchequer.
The activities of family businesses, including across their value chains, adds £575 billion in economic activity (GVA) every year. Without them the British economy would be considerably smaller.
The current system of Inheritance Tax reliefs, which has been in place since 1976, has allowed family business owners to confidently plan for the future knowing that, in the event of their death, the next generation will be allowed to take over the business without incurring significant tax penalties.
We believe the changes to BPR and APR, announced in the Budget, represent a failure by Government to understand the nature of the reliefs and their role in supporting long-term patient investment.
As the largest organisation advocating for and representing family businesses and the model of family ownership, we believe the changes in the Budget are hugely damaging not just to family-owned enterprises but the entire UK economy. We are asking the Government to consult with us, our members, partners and stakeholders to reverse the changes.
What is changing
Current system
- Inheritance Tax at 40% with a nil-rate band at £325,000 + an additional £175,000 nil-rate band for residences in estates less than £2million – frozen until 2028 (amended in the Budget, see below)
- Qualifying business property attract either a 50% or 100% relief from Inheritance Tax.
| Qualifies for BPR at 100% |
Qualifies for BPR at 50% |
- A business or interest in a trading business.
- Shares in an unlisted trading company, and those on the Alternative Investment Market (AIM).
|
- Shares controlling more than 50% of the voting rights in a listed company.
- Land, buildings or machinery used in the business (either owned by somebody or held in trust).
|
NB – The trading test for IHT excludes most property investment and financial services businesses from claiming BPR at all and that has long been the case
New system
- Under the new IHT rules, only the first £1 million of combined family-owned business and/or agricultural assets will receive 100% relief.
- The headline rate of IHT remains at 40%. Nil-rate bands frozen until 2030.
- However, anything above £1 million, and therefore caught by IHT, will receive 50% relief (i.e. 20%) Inheritance Tax.
Over the course of this Parliament, the Government forecasts that these changes will raise:
| 2024-5 |
2025-6 |
2026-7 |
2027-8 |
2028-9 |
2029-30 |
| £0 |
£0 |
£230 m |
£495 m |
£520 m |
£520 m |
£520 million p.a. represents 0.02% of GDP (based on 2023 GDP)
In its assessment of the changes, the Office for Budget Responsibility says the costings for these changes are unlikely to reach a steady state for at least 20 years. Moreover, the way in which people respond to the changes will lead to a reduction Inheritance Tax yields by 40% as people make use of allowances and dispose of assets before death.
It is worth noting that, for now, the rules on lifetime gifting (ie immediate potential CGT with possible holdover relief and a 7 year survival rule for IHT) remain unchanged.
Trusts: Gifts into Trust of property during the lifetime of the donor / settlor will be subject to the new IHT rules. However, the Government will run a technical consultation, early next year on the rules around Trusts. One of our asks of Government is to broaden this consultation to look at changes to IHT reliefs in the round.
The Dividend Tax
It is unclear whether the Government has fully considered how the majority of estates will fund the IHT charges. Typically, more than 90% of the personal wealth of family business owners is invested in and tied-up in the business.
It is not stored in cash, or as liquid assets that are easily accessible for those taking over the business to pay an Inheritance Tax bill – especially when it happens unexpectedly such as the sudden death of a family member who is also the business owner.
To pay the IHT liability these businesses would have to extract cash from the business in the form of a dividend to the recipient beneficiary paying the IHT. In most cases dividend tax rates will apply, with a cost of extraction nearer 40%. Rather than pass the business on to the next generation, and secure long-term jobs and employment of their staff, business owners will be left with no choice but to borrow heavily (for tax not expansion reasons) or sell.
The government defines a micro business as a business with a balance sheet of less than £1.6m, a small business as less than £8.3m and a medium business as less than £36m.
Impact on growth and jobs
Research produced for Family Business UK by CBI Economics ahead of the Budget showed that £29 billion and 391,000 jobs could be lost without policies that support family businesses.
The findings showed that removing Business Property Relief (BPR) and Gift Holdover Relief (GHR) would lead to significant impacts on family business:
- 48% would reduce investment
- 30% would reduce headcount
- 24% expect lower turnover
- 16% of family businesses would expect to sell up to pay Inheritance Tax
- 347,000 micro and sole trader firms could be forced to close
The current system should be retained
Business Property Relief has been retained by successive governments for almost 50 years after it was introduced by a Labour government in the 1970s.
Previous governments have understood that BRP and APR provided a lifeline to family firms, enabling them to make long-term investment plans in the knowledge they will not be financially disadvantaged if the owner passes away.
Moreover, these reliefs allow family businesses to compete on a level playing field with other models of business ownership, none of which are subject to these additional tax liabilities when the ownership is transferred. Removing the reliefs will leave British owned family business uncompetitive.
The damaging impact on family businesses and the jobs, investment and growth they provide to their local economies, means the government must think again.
About Family Business UK
Family Business UK is the largest organisation dedicated to promoting, championing and advocating for family businesses. It is movement of the largest and best-known family businesses across the country, including a number of household names and global companies, and small, high-growth SMEs. It works to showcase the role family businesses play in creating a more prosperous and sustainable future and highlighting the impact of family-owned businesses.
FBUK is a not-for-profit organisation.
