Tricky business: The challenge of inheriting the family business

By Luke Cheadle, Head of UK Operations for The Estate Registry

Of all the assets an individual may accrue over their lives, one of the more challenging when it comes to inheritance planning – or resolving once a loved-one has died – is a business.

Business owners and beneficiaries can typically obtain either 50% or 100% tax relief on certain (but not all) business assets. It’s a relief that can be claimed either whilst the owner is alive, which helps plan the future transfer of assets, or it can be claimed later as part of their will. Although this may be about to change.

As probate professionals, you will no doubt be familiar with the challenge as it is today. The context is interesting: family-owned businesses are important to the British and the global economy, but one of the biggest risks is when the founder passes. It’s a startling statistic, but less than one in five family businesses last more than two generations1 after the death of the original founder because of a lack of succession planning, and for wont of an appropriate family wealth and business tax planning strategy.

Does the business stay, or does it go?

So what can individuals do if they inherit a business (or shares in a business) where a clear succession strategy does not exist, and adequate plans have not been put in place?

The first question you will ask them is whether they want to continue with the business. This will, in part, depend on whether they have been actively and operationally involved in the business to date, in which case it is more likely that they may wish to continue. The second question is whether they can afford it and whether they can pay the potential tax bill coming their way.

The third point you will consider is the type of business your client is due to inherit. Business relief (currently) completely exempts the value of a business and shares in an unlisted company from inheritance tax where the deceased controlled the business and where the deceased was an arm’s-length investor (holding AIM shares, for example) of an unlisted business. This applies to both private businesses and partnerships, providing they are not merely a holding company for other investments.

Most business wealth (90%) is typically inherited as part of an estate worth over £2 million and often includes agricultural land.2

Finding relief in taxes

At the time of writing, agricultural relief frees farms from 100% of inheritance tax after a minimum holding of two years if the land is occupied and farmed by the owner, is controlled by a company they or their spouse or civil partner own, or after seven years holding if there the land has a tenant. It can also be gifted away seven years before their death.3

Again, the statistics make interesting reading: In 2020–21, some 1,300 estates benefited from agricultural relief, relieving an average of almost £800,000 of wealth from inheritance tax per claimant. In the same period, 3,380 estates benefited from business relief, with an average of £950,000 in wealth relieved from inheritance tax claimants.

A tax that has been much in the news in recent weeks and will continue to be for some time to come is Capital Gains. Capital Gains Tax (CGT) is applied to the increase in asset value (excluding the main home and assets held within an ISA or pension) from the time an asset was acquired to the point that it is sold.

Since 1971, when someone dies any accrued capital gains, including those on businesses, are generally exempt from inheritance tax and beneficiaries are only taxed on gains from the date of death. CGT incentivises individuals whose assets have large accruals to hold those assets (e.g. a rental property or private business) until death and the tax is wiped out.  More than 70% of UK taxable gains come from the sale of unlisted businesses.

Taxing times

Of course, all this may be about to change with a new Government. Since December last year, the Institute for Fiscal Studies (IFS) has been advocating the abolishment of inheritance tax relief as a way for the UK Government to raise up to £3bn in tax revenue. It would appear certain parties have been listening.

The new Government may consider doubling the main CGT from 20% to 40%4 and scrapping 100% tax relief on inherited agricultural land and family businesses. Alternatively, the tax relief may be reduced on a sliding scale, with a cap for agricultural or business relief per person of £500,000, or a total of £1m per person if both forms of relief can be claimed.

Either way, the impact on many agricultural and family businesses could be profound. It could mean the end of many family businesses, in one rather than two generations, as executors are forced to sell in order to pay their inheritance tax. How much reform change is likely to take place and how many more people will become liable for inheritance or CGT taxes will only become clear later this year.

This article was submitted to be published by The Estate Registry as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.

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