New tax rules have raised the stakes for family businesses planning for the next generation. Mel Archbould, founder of Cloud-Busting, explains why the conversation needs to start early...
For family businesses, the new Business Property Relief rules are not simply another tax issue. They are another reason why succession conversations can no longer wait until somebody is ready to retire.
The cap was announced in the October 2024 Budget, initially at £1 million, before the Government increased it to £2.5 million in December 2025. From 6 April 2026, a £2.5 million allowance per individual applies to the combined value of assets qualifying for 100% Business Property Relief or Agricultural Property Relief. Qualifying value above that allowance receives 50% relief, creating an effective Inheritance Tax rate of up to 20% where the standard 40% rate applies.
Unused allowance can transfer to a surviving spouse or civil partner, potentially giving a couple up to £5 million combined. This is not automatic; ownership, eligibility and how much allowance has been used all matter.
A simple illustration brings the potential exposure to life. If a sole shareholder leaves a qualifying business worth £5 million, and no transferable allowance or nil-rate band is taken into account, the first £2.5 million could receive 100% relief. The remaining £2.5 million would receive 50% relief, leaving £1.25 million taxable. At 40%, the resulting IHT would be approximately £500,000.
The business may be worth £5 million without the family having £500,000 sitting in cash. Its value may be tied up in premises, machinery, stock, goodwill and future earnings.
The rules allow eligible IHT to be paid in 10 equal annual interest-free instalments. That can ease the immediate pressure, but it does not remove the liability. Cash still has to leave the estate or family and may ultimately need to be generated by the business.
This is why tax planning cannot be separated from succession planning.
At a recent networking event, I spoke to a third-generation family business leader whose family had been working through exactly this issue. After modelling the potential liability, they had spent considerable time and money reviewing how assets were held, rebalancing the balance sheet and ensuring suitable liquidity was available. They had also identified which assets could be realised, if necessary, without weakening the trading business. Their aim was clear: a future tax bill must not force the next generation to sell or damage the business they were trying to protect.
Families need to understand who owns what, what the business is realistically worth, what each generation wants, and whether their wills, shareholder agreements and ownership structures still reflect those intentions. They must also distinguish between ownership and management: passing shares to the next generation does not automatically mean those family members should run the company.
Good succession is not a single event. It is a journey that may take years.
You should start with an up-to-date valuation and advice from your accountant, tax adviser and solicitor. Then have the conversation no professional adviser can have for you: what do we, as a family, actually want to happen to this business?
The rules may well change again. Always remember: good preparation protects choice.
Cloud-Busting is a Chesterfield-based business consultancy that helps SME owners and family businesses plan leadership succession and scale sustainably. Find out more at cloud-busting.com.
