Written by Eamonn Donaghy
As the office party season moves into full swing and we start thinking about a well-deserved break over the Christmas holidays, the last thing on most people’s mind will be the joys of the tax system. Much has been made of the impact of recently announced changes to the inheritance tax regime on farmers – business owners across all sectors will be affected and will no doubt be considering that impact over the festive period (hopefully not whilst enjoying their Christmas dinner!).
There will be many company owners who have based their inheritance tax planning on holding onto their family company shares until they passed away. Up until recently, this was quite an efficient way of passing down the family shares to the next generation on the basis that business property relief at 100% would have eliminated the charge to inheritance tax and the capital gains tax market value uplift on death meant that not only would there be no capital gains tax to pay on death but the share recipients would acquire the shares with a market value base cost at that time.
All very neat and tidy – even if that meant the recipients of the shares were likely to be well past the first flushes of youth.
Other more progressive shareholders may have placed some or even all of their shares into a family trust at some stage. The transfer to the trust would have been on the basis that the shares would have qualified for business property relief at 100% which would have eliminated the charge to inheritance tax on the transfer to the trust.
On top of that, capital gains tax holdover relief would have been applied to defer any capital gains tax that would have otherwise arisen on the transfer of the shares to the trust. As long as the trust held onto the shares, then even if the transferor died within seven years of the gift, the business property relief at 100% would have eliminated the charge to inheritance tax at that time.
However along comes the Budget and with effect from April 2026, business property relief is no longer 100% of the value of the assets being transferred but is reduced to 50% of the value of the assets being transferred in excess of £1m.
Not only will this affect those who want to die with their ‘boots on’, it will also have an impact on those who are thinking of passing their shares into a trust. To put this in context a company whose shares currently qualify for business property relief that are currently valued at £5m could be transferred on death or put into a trust while the owner is alive and no inheritance tax charge would arise in either case.
However, post April 2026, the inheritance tax payable as a result of either a death transfer or placing the shares into a trust could amount to £800,000. In both cases, there would be no ‘sales proceeds’ to pay the tax and thus funds would have to be sourced in order to pay the inheritance tax bill.
Unsurprisingly, the above scenarios are not ones that would appeal to many current shareholders and there is likely to be a lot of discussion between now and April 2026 to determine how best to mitigate the exposure to inheritance tax that will arise at that time. One such solution would be to gift the shares to the next generation whilst the existing shareholder is alive.
This would be a potentially exempt transfer [PET] and if the donor survives for seven years the PET would fall outside of the charge to inheritance tax. However, this solution results in the next generation being the owners of the company and this may not be the desired outcome for a myriad of reasons including the children being too young, too inexperienced, or indeed too uninterested.
Placing the shares in a trust before April 2026 is another possible solution but there will be a discrete inheritance exposure from April 2026 until the seventh anniversary of the transfer to the trust, and this exposure would be up to 20% of the value of the shares at the time of transfer in excess of £1m. A well-designed life insurance policy could mitigate this risk – but that will come at a price.
The sands of estate inheritance tax planning have shifted. Careful thought will be required to mitigate an unpleasant tax charge arising at a time when there are no sales proceeds to fund such a bill. However rather than ruin the Christmas spirit I can understand why many would wish to pick this up in the New Year. However, pick this up they should!