Helping you prosper
You’ve created a successful business over many years, and now the time has come to think about stepping back and passing the business to the next generation.
But passing on a family business is rarely just a question of tax. How do you transfer what may be your life’s work while balancing control, family expectations, the future of the business and your own plans for retirement?
Succession is about more than tax
One of the biggest changes we have seen in recent times is the cap on business property relief (BPR) available for Inheritance Tax (IHT). Previously, 100% of the value of a qualifying trading business could be passed on with 100% BPR. From April 2026, this has changed. The new rules allow for, potentially, up to £2.5m (£5m for a married couple or civil partners) at 100% relief with 50% relief on the value above this.
This means that it’s more important than ever to plan ahead and look at how a smooth transition can be achieved while also minimising tax exposure.
There are a number of potentially effective routes, including outright gifts, staged share transfers, the sale of the business to family, employee ownership trusts and growth/freezer shares. All of these have their place in tax planning and can be useful depending on the circumstances. A full review can help identify which options may be appropriate for the business, its owners and the next generation.
However, in reality, there are a number of issues that can affect which strategies should be used, and it’s not always as simple as determining the ‘cheapest’ solution.
Are you really ready to let go?
One common problem we see is an owner who knows it is time to step back but finds it difficult to relinquish control.
You’ve spent years putting blood, sweat and tears into your business. You know you need to pass on the torch but the thought of not having control over the business and leaving another person completely responsible weighs heavily on your mind.
You feel the need to retain some level of control or the ability to make the final decision on major business decisions. You quickly end up in a version of retirement that still involves far more of the business than you originally intended.
What does ‘fair’ look like?
There is also the question of fairness. Picture this, you have three children, two of them went off into their own careers, and are doing well and you helped them on their path. The third stayed behind, got up with you on the cold winter mornings, stayed late into the night to get that one big project completed on time and helped you grow the business into what it is today.
You know this child should take over the business, but what about the others?
Is it fair that they lose out on the largest part of your net worth? Is it fair to the third, who helped you build the business to have two thirds of it given away to people who had nothing to do with its growth?
There is rarely a straightforward answer. What feels equal may not necessarily feel fair, and these are often family questions as much as they are financial ones.
Does the next generation actually want the business?
Possibly the biggest issue we see for many owners is a deceptively simple question: does the next generation actually want the business?
We have seen businesses passed to a second generation whose hearts were never truly in it. They take it on because they feel that they owe it to their parents, but the founder's drive and passion simply isn’t there.
Without the right commitment, leadership and succession plan, the business can quickly begin to struggle and the value built up over many years can be put at risk.
Why timing matters
The final issue is timing. Effective planning can take years, but many owners try to plan on their deathbed. The most surefire way to ineffective planning is no planning at all. Leaving succession planning too late can significantly restrict the options available.
Before you know it, assets may need to be sold to pay tax, or projects underway may be left unfinished because there was no real plan in place for the transition.
Turning the conversation into a succession plan
All of these issues can be addressed through proper planning and honest conversations.
That might start with a family meeting and a simple question: does the next generation actually want the business?
If the answer is yes, other questions follow. What timescale makes sense commercially? How much control does the current owner want to retain? Do they still want an active role or would passive ownership be more appropriate? How does this fit with the tax planning? And what does life look like once the regular income from the business stops?
Finding the right structure
For some businesses, particularly those with significant assets, one option may be to introduce growth and freezer shares. Shares can be created for the next generation which begin to accrue value once the company reaches an agreed value, commonly referred to as the ‘hurdle’.
At the same time, the existing owner’s shares have their value frozen, so that further growth does not continue accruing to their estate.
While this does not reduce the existing value of the owner's estate for IHT purposes, it can allow future growth in the value of the company to accrue to the next generation rather than continuing to increase the value of the owner's estate.
The advantage of a growth/freezer structure, especially for those who are not yet prepared to hand over the reins, is that it may be possible to structure the shares so that the existing owner retains voting rights and therefore an appropriate level of control.
Employee Ownership Trusts (EOTs) can provide another succession route, allowing ownership of a business to pass for the benefit of the employees who have helped build it. However, recent changes to the tax treatment of EOTs mean that the potential implications need to be considered carefully when assessing whether this remains the right option for a particular business.
For a trading business, passing on the company to the next generation by way of staged gifts can also be highly effective. Depending on the circumstances, Business Property Relief and relief from Capital Gains Tax may help manage the tax consequences of gifting qualifying trading company shares to the next generation.
Of course, any such strategy depends on there being a genuine desire from the next generation to continue the business. In some cases, a combination of different options may ultimately provide the right solution.
Start the conversation early
Having seen numerous clients go through this, both good and bad, we have seen that there is rarely a ‘one size fits all’ solution to succession planning. We understand how important it is to have these conversations early. Effective succession planning needs to balance tax efficiency with the future success of the business, the ambitions of the next generation and the owner's own plans for retirement.
On a number of occasions, we have worked with local solicitors and IFAs to draw up agreements and plan future wealth as part of a coordinated approach to achieving a smooth and effective transition.
The next step
We often like to ask our clients: if you couldn’t come in on Monday, who decides, who manages and who gets paid? If you can’t answer each of these with certainty, it may be time for a conversation with our team.
If you have any questions, please get in touch with Cairon Pearce and Stephen Hargreaves, or your usual UHY adviser.
