Never did I think that my advice to a client with a really poorly family member would be to pass away before 5th April 2026 — but that decision could save their family over half a million pounds.
Let that sink in.
Because that’s the kind of conversation we’re having now. Not about growth, legacy or succession — but about how the timing of someone’s death could navigate an inheritance tax system that’s made it nearly impossible to pass down a family business without facing crippling penalties.
For years, there’s been a level of protection for family-run businesses and farms. Business owners could build something up, pass it on tax-free, and feel proud that all those early mornings, missed holidays, and hard-won profits weren’t just for them — they were for their children, and their children’s children.
That’s no longer the case.
Following Rachel Reeves’s recent budget, those options are disappearing. Under existing and new rules coming in from April 2026:
- A business can’t buy back the owner’s shares if they’re passed to a connected person (like a son or daughter) without the proceeds being taxed as dividend income.
- If a family member does buy the business, they’ll likely need to raise capital or debt — a significant challenge in the current financial climate.
- Even if you gift the shares, any value growth is still chargeable when the recipient sells them as well as additional inheritance tax if they pass away within seven years.
- And while transfers between spouses are still exempt from inheritance tax, that does nothing to help a family pass their business across generations — which is the whole point for many of our clients.
Here’s the real issue.
Traditionally, in a family business, the father might step back from day-to-day operations but remain as a shareholder. This allows him to extract value from the company over time, through dividends or salary, while the business itself continues to thrive under the next generation. When he eventually passes on, that business — along with its retained cash — could be inherited tax-free under Business Property Relief. It was a double win: Dad could retire with income from the business, and the children could inherit it without a tax bill.
Now? That’s been turned upside down.
We’re seeing clients with significant retained cash in their businesses — and no efficient way to extract it. If the company is passed on after April 2026, inheritance tax may apply at a rate of 20% on the business value. If the next generation then tries to extract the retained cash, they face dividend tax of 39.35%.
And here’s the kicker: the inheritance tax bill has to be paid by the personal estate — not the business. That means the family must somehow access the money within the company to settle that personal liability. But to do that, they’ve got to extract funds from the business, and in most cases, that comes with a 39.35% dividend tax.
So instead of a smooth succession, they’re potentially facing a combined tax hit of up to 65%.
That’s not a reward for building a sustainable, long-term business. That’s a punishment.
And here’s something many don’t see: most business owners don’t even take the full value out of their business each year. If they were employed, they might earn a six-figure salary. But because they’re building something bigger — something lasting — they might only take 75% of that, reinvesting the rest, or leaving it in the company. They’re not always doing it for income. They’re doing it for future wealth, for their family, for the legacy. And yet, this is the blow that undermines all of that effort.
Worse still, many adult children might not want to actively run the family business, but know that keeping it intact makes more sense than selling it. This new tax environment makes that commercial logic even harder to justify.
So where do we go from here?
Because right now, the rules aren’t encouraging legacy. They’re pushing people to exit. And the emotional toll of that — not just the financial one — is something I don’t think we’ve even begun to understand.
I’d love to hear your thoughts. Are you in this situation? Do you know a business facing this dilemma?
Because quite honestly, it feels like we’re being left without a roadmap which could all change the next time Rachel Reeves delivers a budget!
Let’s talk.
