SME Succession Post-Budget

Have you considered SME succession post-Budget?

For many business owners, their preferred exit from the family business is to pass it on to their children, for nil consideration. Particularly if the children work in the business. The recent Budget, however, signalled the Government’s intention to change the Business Relief Inheritance Tax rules w.e.f 6 April 2026, so many business owners are considering what is now the most tax efficient mechanism to transfer ownership of this valuable asset.

As a Legacy through your Will

Up until the recent Budget, the most common way to pass on land backed trades, like farming, was through your Will. This not only enabled capital taxes to be avoided upon transfer, but it also resulted in a tax free uplift of the business base cost – which would benefit the next generation if they, say, decide to sell some land in the future. The Budget obviously proposes to make Inheritance Tax Business Relief less generous in the future, so this mechanism will be losing at least part of its lustre. But do not act in haste to rule out this mechanism, as passing on a business via a Will is still much more Inheritance Tax efficient than passing on any other form of wealth – if the shareholding is worth over £1m, you may be able to also use your spouse’s Business Relief exemption (if both Wills can now be re-written), and even if the value is over this threshold the IHT rate is still only half the full rate.

Lifetime Gift

The simplest way to transfer ownership is via a gift. If the business is a trade (rather than investment based), if both parties sign a Hold-over Relief Capital Gains Tax election and if the gifting party survives 7 years, once again, it is usually possible to steer clear of all capital taxes. But this structure does not result in a tax free base cost uplift and 7 years is sometimes considered rather long.

Phased Transfer 

Sometimes, perhaps because the business is not classed as a trade for tax purposes, a more complicated and gradual transfer of ownership is required, if tax efficiency is required:

• • For unincorporated businesses, the children can be brought into partnership, with ownership/value transferred to them over time by use of appropriate profit share and drawings policies.
  • For limited company businesses, shares can be restructured, to give the existing owners shrinking shares and the next generation growth shares.

Via a Trust

Transferring ownership to a trust, rather than direct to the children, can give various tax, control and protection benefits. However, the tax rules changed a number of years ago, to often crystallise an Inheritance Tax liability upon initial transfer, albeit at half rates and a further 6% tax charge every 10 years thereafter.

As well as minimising tax, business owners will be conscious that there are various other succession aspects to consider:

• • Control
  • Wealth preservation (in the event of children getting divorced)
  • Requirements for income in retirement
  • Keeping your affairs simple
  • Family dynamics (including separating ownership and management)

Get In Touch

To discuss SME Succession post-Budget, the options available and to discover which solution is now best for you, contact your local Whitings LLP office to speak to a member of our team today.