Business owners and shareholders planning to gift shares to their children because of impending changes to inheritance tax (IHT) are urged to seek advice.
The announcement of changes to Business Relief (BR) in last Autumn’s Budget has caused some panic among those most likely impacted. Changes to the IHT relief available for assets qualifying for BR and Agricultural Relief (AR) are expected to come into force in April 2026.
Although the legislation has not yet been finalised and a consultation is imminent as to the application to trusts, the proposals cap the amount of relief available. This means the first £1 million of qualifying assets will be exempt from IHT and the rest will attract 50% relief, rather than the current 100% relief. Also, unlisted shares (such as those on the AIM market) will qualify for 50% relief, down from the current 100%.
In light of the changes, many people are considering whether now could be the time to pass their shares in their trading companies on to the next generation of their family to reduce the IHT exposure on their death. However, now is not the time to make rash decisions.
It’s important for business owners concerned about the impact to take a step back and consider the bigger picture before rushing into gifting shares. If done too quickly, it might prove disadvantageous to them and their family.
People have a feeling that they need to do something and the concentration has been very much on shares in a company – and that might not be the right thing to focus on. Important decisions shouldn’t be made just for tax reasons. If people didn’t think of gifting shares to their children before then it may just be the IHT changes driving their thinking. There must be other reasons why they haven’t given the shares away previously, and these reasons may still be valid.
For example, if it is a family company, is now the right time for children to take control? They may be facing other issues such as an impending divorce or financial difficulties owners may not be aware of or they may not have the experience needed, potentially leaving the business susceptible to problems. Also, is giving shares away the best thing to do, particularly if business owners need the income/capital value or it results in the loss of control of their company?
For some people, it is definitely worth considering other options such as making gifts of shares to trusts or individuals, but this may not be the right solution for everyone. Before giving shares away, the implications need to be understood.
The younger business owner could gift shares or give something away, but life insurance to cover that exposure instead may be a better option depending on the circumstances. It might even be worth combining keeping those shares alongside insurance cover to protect against the tax liabilities that may arise on death.
They need to think also about other assets. Maybe giving away something that is a bit simpler and doesn’t generate any income, or that would not benefit from any IHT relief.
The first step should be to seek professional advice that considers the full picture, particularly with regard to the impact and exposure of IHT changes and BR/AR implications.
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The information contained within this insight is for guidance only and does not constitute advice which should be sought before taking any action or inaction.