Family businesses: don’t get caught out by the BPR changes in April 2026

Business Property Relief (BPR) is changing and the impact on family businesses that need to prepare (and fail to do so) could be catastrophic.

By way of background, a key function of BPR (originally introduced 50 years ago) was to ensure that shares in businesses could be left to the next generation without crippling inheritance tax (IHT) charges hampering business continuity after the death of an owner.

The effect of BPR prevented businesses needing to be sold or pillaged in order to fund the payment of inheritance tax.

As part of the wide-ranging impact of last year’s budget on family businesses, BPR will now be heavily restricted.

Specifically, qualifying business assets worth more than £1M will no longer attract 100% relief and, instead, will be taxed at an effective rate of 20% for inheritance tax purposes.

Worse still, unless there are significant other assets to fund IHT, the effective tax rate could be much more as the tax liability falls on the individual, not the company, meaning that taxable income may need to be extracted from the business to fund it.

These changes will apply from 6 April 2026 and anti-forestalling provisions (broadly speaking, provisions to prevent avoidance of the changes) are already in force and have been since 30 October 2024.

To illustrate the impact of the change

Imagine a scenario where two spouses own 50% of a trading family company each. The daughter is active in the management, with plans for her to take over the reins and own the company when her parents die. The company is worth £4,000,000 and the spouses intend to leave their shares to each other, with the surviving spouse leaving the shares to their daughter.

Should the husband die first, there would currently (and will continue to be) no IHT charge on the £2m of shares left to the wife under his Will. If the wife then dies before 6 April 2026 and leaves the shares to her daughter, there will, again, be no IHT charge, due to the existing BPR at 100%.

However, as a result of the upcoming changes, if the wife dies after 6 April 2026, leaving the shares to her daughter, there will be an IHT charge of £600,000 (£1M allowance, 20% charged on the £3M and presuming other allowances such as Nil Rate Bands are used up by other assets).

Whilst outside of the scope of this article, changes can be made to the Wills to mitigate the impact of this. Due to the fact that £1M BPR allowance will not be transferable between spouses, Wills can be updated to provide that £1million of the shares are left directly to the daughter on the death of either spouse (rather than the surviving spouse).

In that scenario there would still be no IHT on the husband’s death, and on the wife’s death £3million to daughter £1million tax free and £2million at 40% = £400,000, reducing the overall IHT liability by 1/3 (or £200,000).

The corporate implications

Estate planning (including carefully considered Wills) need to dovetail with corporate advice, but the focus of this article relates to navigating the corporate changes to businesses that may be needed to accommodate succession plans and ownership structures to deal with the new landscape.

You will see from the above example that, at some point, the mother and the daughter will be in business together after the father dies. This is a new dynamic, not previously anticipated. Consideration may need to be given to voting rights, income rights and capital entitlements. It would not have been the intention for the mother’s dividend income to half or for the daughter to be able to have the power to transfer her shares (if she loses interest) whilst the mother is still a stakeholder.

The daughter may be in a poor marriage bringing with it the risk of her shares being split on a divorce. Amending the facts slightly, what if the daughter is not involved in the business (and is still a minor) or there is a second adult child, who becomes a shareholder, but is not involved or interested in the family company.

There are a myriad of issues to consider. Each family business is different.

Business owners faced with these upcoming changes (particularly those in good health and who are unlikely to benefit from the current regime prior to April 2026) are likely to want to consider a number of options:

• Lifetime gifts of shares to their children (subject to anti-forestalling rules should death occur within 7 years of making the gift).
• If lifetime gifts are made to married children, pre and post-nuptial agreements. If they are minors, consider the use of trusts and, if they are not currently married, create future protections in the family shareholder agreement by including provisions relating to nuptial arrangements.
• Putting in place family shareholder agreements and new articles which permit create different share “classes” so that senior members of the family (mum and dad) can control the company through voting rights (and can continue to receive income), but the capital value accrues for the benefit of the shares held by the children.
• Consider insurance over the lives of the existing shareholders to fund IHT charges on the transfer of shares or in respect of lifetime gifts that fail, for example due to the transferor not surviving for 7 years after the transfer.
• Funded succession arrangements such as a “buyout” of the company by the children so that the existing parents (who may retain a role) can enjoy and share the fruits of their labours now.

If succession plans are unlikely to involve the next generation taking the reins of the business, there are still options that SMEs may want to consider, such as a trade sale, in which case they should start to prepare the business for sale. These preparations are key to maximising the value of the business.

It’s worth bearing in mind that Capital Gains Tax (CGT) rates are currently at 24% (with business asset disposal relief over the first £1M) will still be attractive compared to income tax.

For the right business, some owners may also consider an employee ownership trust (EOT). A Sale to an EOT is free of CGT, albeit it can take some time to receive the full purchase price as the sale is typically funded by future profits of the business.

Succession planning, coupled with dovetailed estate planning advice has never been more important. Doing nothing could be disastrous to family businesses / SMEs faced with unexpected IHT liabilities.

If this happens and a quick sale is needed, not only will the IHT need to be funded in short order (or paid over time with interest accruing), sales that are made by a seller under time pressure will rarely achieve maximum sale proceeds.

There are 14 months before the new rules come into place but succession planning and making changes to your company takes time and expertise.

In our next Corporate Insights bulletin, we will take a deeper look at the structure, function, terms and benefits of “family investment companies” (FICs). Companies that require new share structures and corporate arrangements to deal with wider family ownership (as a result, for example, the above changes to BPR) share some characteristics with a traditional FIC.

However, a FIC itself can be an effective standalone tool for families seeking to invest wealth (for example via a property portfolio) in a tax efficient manner for their children and to secure planning for generational wealth for their grandchildren and beyond.

How can Morr & Co help?

If you have a family business and would like more information about the Business Property Relief  changes, please contact our Corporate and Commercial team on 01737 854500 or by email info@morrlaw.com and a member of the team will be happy to help.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.