Succession Planning: a year for change

As the new year begins, thoughts often turn to giving – not just celebrations but the long-term gifts of wealth and security for future generations.

Given the changes announced in the Autumn Budget 2024, lifetime gifts should be considered part of wider, proactive succession planning to manage future inheritance tax liabilities on death alongside other strategies to ensure that assets are passed on efficiently and in line with personal wishes.

This article is a timely reminder of what you should be thinking about at the start of this year.

The Budget’s Gifts

At the end of October, The Chancellor announced a number of measures which included changes to Inheritance Tax (IHT), Capital Gains Tax (CGT), and Business Reliefs. As a reminder, the three key changes impacting succession planning were:

• Agricultural and Business Reliefs:
  From 6 April 2026, the existing 100% BPR & APR will be capped at £1m of combined value in an estate. Where the combined value of an estate exceeds this threshold, a reduced rate of 50% will apply, an effective rate of 20%.

• Business Asset Disposal Relief (BADR)
  For disposals made on or after 6 April 2025, gains eligible for BADR will be taxed at 14% and from 6 April 2026, gains eligible for BADR will be taxed at 18%.
• Pensions
  From April 2027, undrawn pension funds and death benefits are to be included within the value of a person’s estate for IHT purposes. For those who die over the age of 75, IHT will be due on death, with income tax then due on beneficiaries on drawdown of the inherited pension fund – a 67% effective tax rate!

For more information on the Budget announcements – see our link here.

The impact of these changes will be dependent on your personal circumstances, so it is important to review your potential IHT exposure and consider the strategies available to minimise the exposure as much as possible.

New Year’s Resolutions (Strategies)

Spend it!
Some individuals prefer to enjoy the wealth they have accumulated during their lifetime, choosing to spend on experiences, travel, hobbies, or necessary expenses such as healthcare, rather than leaving these assets to be taxed after death. Furthermore, increasing the level of drawings from pensions in retirement may be considered more attractive given the changes noted above.

By reducing the size of their estate through spending, you can lower the exposure to inheritance tax however this does not generate generational wealth.

Pass it on with full IHT exposure
Some individuals choose to retain full control over their assets until death, viewing any resulting tax liabilities as an acceptable trade-off. This approach often aligns with those who value the ability to manage their wealth independently or who have no strong intention to transfer substantial assets, particularly if they do not have dependents or specific legacy goals.

However, this can leave beneficiaries with liquidity issues where IHT liabilities end up being significant and there are insufficient cash reserves. The choice then becomes whether families need to borrow funds, often at high interest rates or sell the family businesses or property, disrupting legacies and livelihoods.

Take out life insurance
Going forward life insurance policies are going to be a more important consideration for owners of family businesses. Under the current rules, where a policy is written into a trust, life insurance proceeds will fall outside an individual’s estate for IHT, allowing the next generation to pay the IHT bill and keep the business going. Whole of life insurance is most usual for inheritance tax planning as the payout is certain and can be guaranteed. It is expensive, as it acts both as a savings plan and as life assurance.

The New Years Question: Gifting or Waiting?

By transferring assets in your lifetime, you can take advantage of the seven-year rule applicable to potentially exempt transfers (‘PETs’), whereby gifts made more than seven years before death are exempt for IHT purposes.

Careful consideration is required so that the current owners retain sufficient income and capital based on their needs whilst ensuring the Gift with Reservation of Benefit rules are not triggered (anti-avoidance rules to prevents individuals from retaining an interest in assets given away to reduce the value of their estate).

BPR & APR reliefs are touched on above, currently there is the potential that any gifts will be relieved from IHT at up to 100%.  From 6 April 2026, the rate of relief will change whereby the first £1m will be relieved at 100% and thereafter relief will apply at 50%. It is important to note that the new rules will apply to lifetime transfers made from 30 October 2024 where the donor dies after 6 April 2026. So a lifetime gift to an individual of property qualifying for BPR or APR at 100% under current rules, made on or after 30 October 2024, where the donor dies on or after 6 April 2026 but within seven years of the gift, will be a failed PET to which will be relieved at the new rates.

There are cash gifts which can be made tax free, there are often overlooked.  Each individual has  of annual gifting allowances, such as the £3,000 annual exemption for gifts. Additionally, individuals can take advantage of small gifts exemptions, allowing them to gift up to £250 per person to any number of individuals per year without incurring inheritance tax.

CGT liabilities on gifts should not be forgotten albeit business asset holdover relief remains an effective relief to mitigate against the CGT on transfer of qualifying business assets.

Business Succession: The Countdown
Business owners must weigh their options in light of the changing reliefs and thresholds. Succession planning isn’t just about tax efficiency – it’s about continuity and legacy. This festive season is an ideal time to revisit shareholder agreements, family governance structures, and succession plans to ensure your business thrives in future generations’ hands.

Family Conversations: Transparent discussions with family members aligning your and their expectations will  alleviate future disputes, setting a harmonious tone for your family’s legacy planning.

Family Investment Companies (FICs)
FICs provide a tax-efficient way to manage family wealth, offering greater control and flexibility, it is not uncommon for FIC’s to combine a variety of ownership vehicles including a trust shareholder.

EOT
Succession dos not always mean passing to your next generation or your co-directors.  EOT’s provide significant tax benefits on sale and enable a company to become employee controlled, which for certain companies is the best way forward.

MBO
MBOs are often used as a succession route ensuring a smooth transition to the emerging team of leaders and continued business success. Essentially, a company’s senior management team takes the lead by acquiring and running the business. This approach allows the existing owners to exit while ensuring continuity and stability within the company.

Trusts: A Present for Future Generations

Despite the common view that trusts can be overly complex, they can be highly effective when looking to minimise your inheritance tax exposure.

Transfers into trust are ‘chargeable lifetime transfers’ and subject to IHT at 20%; the current IHT regime applies decennial charges (a 10-yearly charge) at a rate of 6% to relevant property held within the trust.

The introduction of the new rules will see the same implications for trusts as outlined above, namely that qualifying assets with value in excess of £1 million will be subject to 50% of the decennial charge. This does, however, represent a significant saving when compared to the position for those assets as part of a death estate (3% versus 20%). Therefore, it may be advisable for qualifying assets to be settled onto trust ahead of April 2026 to take advantage of full APR or BPR on the transfer into trust. Again, consideration must be given to the GWROB provisions to ensure this form of planning is effective. It should also be noted that a detailed technical consultation is expected in January to confirm the application of the rules to trusts and trustees holding qualifying business or agricultural property.

Will Updates: New Year, New Will
Ensure your will reflects the new tax environment. Regularly reviewing and updating wills and estate plans is essential to ensure they reflect current laws and the family’s wishes. This includes considering the impact of the new IHT rules and making necessary adjustments to minimise tax liabilities.

It’s common for wills to direct assets to the surviving spouse to take advantage of the IHT exemption for interspousal transfers, however, it does not appear that the £1 million allowance will be transferable to the surviving spouse on death, to the extent that it is unused. Assuming this is the case, consideration should be given as to whether qualifying assets should be transferred to other beneficiaries (or a trust) in order to bank the allowance and ensure that it doesn’t go to waste.

Conclusion

This year, give yourself and your loved ones the gift of clarity and confidence. Whether you’re navigating the nuances of discretionary trusts, preparing to hand over the family business, or simply exploring how to maximise your allowances, we’re here to help. Our team of tax experts are ready to guide you through the evolving rules, ensuring your plans align with your aspirations.

Let’s unwrap the complexities of succession planning together – contact us today for a planning session tailored to your needs. Your future, secured.

We can help family businesses review their business succession plans and shareholders’ agreements, as well as the personal positions of key stakeholders. By proactively addressing these issues, family businesses can continue to thrive and pass on their legacy to future generations, despite the changed tax landscape.

Please get in touch if you have any questions on the upcoming tax reforms or would like to discuss any of the planning strategies outlined above for your family business.