Passing the Family Business to the Next Generation: What the New Inheritance Tax Rules Really Mean

If you own a family business or farm, the past eighteen months have probably felt like watching a tax avalanche in slow motion. The reforms first announced in the 2024 Autumn Budget came into force on 6 April 2026, and they’ve quietly rewritten the rules of succession planning. The good news? With a bit of forward thinking, most families can still pass the business on without it being sold off to pay the tax bill. The not-so-good news? Doing nothing is no longer a plan.

Here’s what’s changed, and what you might want to think about next.

So what’s actually changed?

The basics of inheritance tax look familiar. Estates are still taxed at 40% above the £325,000 nil-rate band, with an extra £175,000 if you’re passing your main home to your children or grandchildren. (That extra allowance starts to disappear once your estate is worth more than £2 million and vanishes entirely above £2.35 million.)

The big shift is what’s happened to Business Property Relief and Agricultural Property Relief – the reliefs that let trading businesses and farms pass through generations tax-free. Until 6 April this year, qualifying business and farming assets could be handed on with 100% relief. From now on, that full relief is capped at £2.5 million per person. Anything above the cap gets 50% relief, which works out to an effective tax rate of 20%.

Translation: the family business is no longer a “no IHT” asset by default.

What does this look like for a real family business?

Let’s say you’ve spent thirty years building a trading company now worth £6 million. Under the old rules, your children would have inherited it without a penny going to HMRC. Under the new rules, the first £2.5 million is fully relieved, and the remaining £3.5 million gets 50% relief, leaving an inheritance tax bill of around £700,000.

Here’s the catch most owners don’t see coming: that £700,000 has to come from somewhere. If most of the family’s wealth is tied up in the business, which is true for the vast majority of owner-managers, the tax can only really be paid by selling shares, taking on debt, or pulling cash out of the company. Any of those options can destabilise the very business the relief was designed to protect.

Alice Edgcumbe-Rendle, who founded Edge Tea & Coffee and recently hired a younger managing director to take the business forward, summed up the mood in the Financial Times: “the risk-reward premium is being eroded.” When you’ve spent years worrying about paying the bills, protecting your reputation, and growing something real, the idea that a chunk of it goes to the taxman at the end can feel like a slap. She’s not alone in saying so.

How did we get here?

The first version of these rules, in the 2024 Budget, was much harsher. The threshold was £1 million per person, and it couldn’t be passed between spouses. Farmers, in particular, were furious and vocal, and the government listened. After months of protests and lobbying, the threshold was raised to £2.5 million and made transferable between married couples and civil partners. So, a couple can now shelter up to £5 million between them.

Even with the concessions, advisers and business owners are warning that the changes will hit successful family-run businesses hard and could dent UK growth. The Office for Budget Responsibility has flagged that revenue from the new rules probably won’t settle into a steady state for at least two years, which suggests we may not have heard the last word on this.

Are lifetime gifts still a good idea?

Yes – and they may be a better idea than ever. The seven-year rule for Potentially Exempt Transfers still works: if you give something away and live for seven more years, it’s outside your estate. Annual exemptions still apply. Gifts out of regular income still apply. Trusts, family investment companies, and life insurance written into trust to cover a future tax bill are all still very much on the table.

What has changed is the urgency. With a hard ceiling on Business Property Relief, owners who were planning to “deal with it later” might want to bring those conversations forward. A staged transfer, some during your lifetime, some on death, can often produce a much better outcome than waiting for the will to do all the work.

A short to-do list for business owners

If you’re a shareholder in a family business or running a farm, this is a good moment to:

• Get an up-to-date valuation of the business – guesses tend to be optimistic.
• Work out, on paper, whether the family could actually pay an IHT bill on your death without touching the business.
• Look again at your shareholders’ agreement, any cross-option arrangements, and your life cover – and ask whether a new policy written into trust could fund the future tax liability.
• Think about whether trusts, lifetime gifts, or a partial handover now make sense, given the £2.5 million cap.
• Dust off the will. Wills written before April 2026 often assume full BPR or APR and can produce some genuinely unintended results in the new world.

A friendly nudge

None of this needs to be alarming, and it certainly doesn’t need to be done all at once. But the families who come out of this best will be the ones who start the conversation early -ideally, years before retirement or any health worries force the issue.

Our Life Planning team helps family business owners think through exactly these questions, in plain language, and at a pace that suits you. If you’d like to talk it through, we’d love to hear from you.