Inheritance Tax for Family Businesses: What role could family Trusts play?

The recent Budget heralds significant change for many family-owned businesses in terms of the Inheritance Tax liability which could apply on the death of a business owner. Whilst most of the publicity with regards to this change has been focussed upon farming businesses, it is also clear that the Budget announcements could heavily impact family-owned trading businesses across all industries.

The key change announced by the Budget was to limit the availability of 100% Business Property Relief (Inheritance Tax exemption) to up to £1 million of business interests held by any single individual. 50% of any value above that could be exposed to Inheritance Tax upon the death of a business owner.

The restriction to the Inheritance Tax exemption is due to take effect to deaths on or after 6 April 2026. This should focus the mind of any business owner with a valuable business to ensure that any individual who inherits such business interests is not saddled with an Inheritance Tax debt, particularly as there may not always be liquid assets to cover such a charge. It should also be highlighted that any extraction of funds from a company to fund an Inheritance Tax charge is likely to trigger a further tax charge.

This is likely to create a greater impetus for business owners to gift part of their business interests to family members during their lifetime. As well as potentially representing sensible succession planning, this will ensure that the 100% Inheritance Tax relief can be spread as each individual will be eligible for 100% Inheritance Tax relief on up to £1 million of business value.  Whilst this may achieve Inheritance Tax efficiency, there may be wider concerns associated with this strategy such as the need to prevent fragmentation of ownership, the desire for existing business owners to retain a level of control and the desire to ensure that the business is greater protected from the impact of family divorce. The above approach may also not present a complete solution to the Inheritance Tax issue if the value of the family business is at a level where the value exceeds the Inheritance Tax free allowances which can be made available by lifetime gifting.

With these concerns in mind, the potential use of family Trusts should be considered. The Budget announcement clearly indicated that an additional £1 million allowance would also apply to Trusts. This potentially enables a family to shelter a further £1 million of value from Inheritance Tax. To the extent that the Trust does not benefit from full Inheritance Tax relief on the value owned within it, there is the added benefit that Trusts are subject to a much lower rate of Inheritance Tax than individuals (a maximum 6% rate on each ten year anniversary of the creation of the Trust). If multiple Trusts are created by the same settlor on or after 30 October, it seems likely that the £1 million allowance will be divided across all of those Trusts rather than each Trust having their own £1 million allowance.  A technical consultation will be published by the Government in early 2025 which will focus on the detailed application of the new rules to Trusts.

If the existing business owner becomes a Trustee of such a Trust, they will retain a level of control and influence as the Trustees are responsible for making key decisions affecting any assets owned within a Trust. In addition, the terms of many Trusts mean that the assets held are not freely available to any single beneficiary which helps to provide a level of protection for those assets from claims made by divorced spouses.  

The Birketts view

Whilst there are extra tax compliance requirements associated with Trusts and legal duties imposed upon Trustees to act in the best interests of beneficiaries which all need to be fully understood before Trusts should be created, it is an option which should be carefully considered as part of any succession planning discussions.

Birketts Trusts & Fiduciary Team are able to fully advise on all of these issues as well as deal with the management and administration of such Trusts.