Family business succession planning
The potential upcoming changes to Inheritance Tax (IHT) could have a wide ranging impact across many farms and businesses, particularly in regards to family business succession planning. These impending changes will affect all family businesses with a value of over £1m. Earlier this year, farmers made their feelings on this topic known, through the CLA and NFU, and by driving their tractors into London.
As it stands each partner or shareholder in a family business will be limited to passing on £1m of assets tax free when they pass away, which is minimal in many instances, particularly if they own land, premises and machinery.
What is family business succession planning?
Family business succession planning is paramount to keep businesses viable for the next generation, but consideration must be given as to how to keep the business within the founding family and safeguard wealth across generations.
Whatever your business structure, having in place an effective succession plan can help to ensure that the transfer of your business goes as smoothly as possible. Failure to make an adequate plan can have far-reaching effects and could lead to disruption, disputes, and tax consequences which could have been avoided, or even a failure of the business entirely.
Protecting wealth across generations
In the normal course of events during the family business succession planning process, parents hand over their interests in the business to their children when the children are ready to take over the responsibility. If the new IHT legislation described above does come into force, parents may be tempted to make those transfers sooner, with a view to maximising the tax reliefs that are available.
For example when a father, mother, son and daughter are working in the family business, the parents will try to equalise the underlying capital assets so that each party has £1m of assets in their sole names, upon which the IHT £1m relief could apply, if and when they die. However, this strategy can bring other problems to the fore.
If the son or daughter is newly married, they now personally own significant assets (£1m in their own name). If their marriage later ends in divorce, their spouse may have a claim on these assets during the divorce settlement, putting the family business as a whole at risk. On this basis, it’s important to give consideration to family business succession planning at the soonest juncture.
At the present time, the transfer of assets into a trust will receive the tax reliefs currently available, and hold over relief can be claimed for capital gains tax purposes. Once the assets are in the Trust they are safe from outside third parties, but will be subject to the tax treatment of trusts, which can of course change over time. They are no longer subject to Inheritance Tax upon death, provided the donor lives for seven years from the date of transfer.
The charge to tax, currently at 6%, is charged at each ten year anniversary of the trust. It effects the net value of any relevant property in the trust, after deducting any debts and reliefs that are available on the assets of the trust such as BPR or APR, and the nil rate sum, currently £325,000. How this will change with the new IHT rules is yet to be disclosed.
Our Wills and Estates team are on hand to advise you on family business succession planning, including trusts and declarations of trust over the assets. The team are closely monitoring HMRC’s disclosures in this regard.
Farming families often face unique pressures when relationships break down, particularly where land, property, and long-standing family arrangements are involved. Unlike many other businesses, farms are often passed down through generations, making them not just a financial asset but part of the family's identity and heritage. When a divorce or separation occurs, the disruption can stretch far beyond the couple themselves - potentially impacting parents, siblings, children, and even the viability of the business. Unpicking ownership, financial contributions, and future responsibilities can be incredibly complex, especially where multiple family members are involved in the running of the farm, or where the farm is the main source of income for more than one household.
That’s why, however uncomfortable it might feel at the outset of a relationship or marriage, it’s worth considering a prenuptial agreement. These agreements are not just about protecting wealth - they’re about setting out clear expectations and minimising conflict down the line. For farming families in particular, a prenup can offer a layer of certainty, helping to safeguard the future of the business and ensure that land and assets stay within the family if a relationship breaks down. At their best, these agreements create space for honest conversations early on, giving everyone - whether part of the family by birth or by marriage - a clearer understanding of their role and their rights.
Our Agriculture team can advise individuals on family business succession planning matters and business owners on the implementation of a pre-nuptial agreement. A pre-nuptial agreement is a written contract entered into by a couple before they get married or enter into a civil partnership, that enables them to select and control many of the legal rights they acquire upon that marriage or civil union.
In some circumstances it is possible to do a post-nuptial agreement, so that a married couple can document what will happen to their wealth should the marriage or civil union end in divorce or separation.
Thompson Smith and Puxon has extensive experience in advising business owners on their family business succession planning needs. If you would like advice, or more information on family business succession planning, please contact our specialist Agriculture team by emailing enquiries@tsplegal.com.