New IHT Rules Affecting Family Businesses

However, upcoming changes to inheritance tax (IHT) rules could create significant challenges for thousands of UK family businesses. In particular, the Government’s decision to bring unused pension assets into the inheritance tax net from April 2027 may have serious consequences for business owners who hold commercial property or business assets within their pension arrangements.

Many entrepreneurs have used Self-Invested Personal Pensions (SIPPs) or Small Self-Administered Schemes (SSASs) to purchase commercial property such as:

• Business premises
• Warehouses and workshops
• Agricultural buildings
• Specialist machinery and equipment

For years, this has been considered a sensible and tax-efficient planning strategy. Business owners could receive rental income from the property during retirement while retaining the asset within their pension. On death, any unused pension funds could often be passed to beneficiaries outside of the inheritance tax regime.

From April 2027, that position is set to change.

Unused pension assets are expected to form part of an individual’s estate for inheritance tax purposes, potentially creating substantial tax liabilities for families and business owners.

One of the biggest concerns is not simply the tax itself, but how that tax may need to be paid.

Unlike cash deposits or investment portfolios, commercial property and business assets are typically illiquid. A factory, office building or workshop cannot be sold overnight, particularly if market conditions are challenging.

If a significant inheritance tax liability arises following the death of a business owner, families may find themselves under pressure to generate funds quickly. In some cases, this could mean:

• Selling commercial property held within a pension scheme
• Disposing of business assets earlier than planned
• Taking on additional borrowing
• Reducing investment in the business
• Disrupting succession plans

For some firms, the need to raise cash rapidly could place additional strain on business continuity and long-term growth.

Under current rules:

• Individuals generally have a £325,000 inheritance tax threshold (Nil Rate Band).
• An additional Residence Nil Rate Band of up to £175,000 may be available when a main residence is left to direct descendants, subject to certain conditions.
• Married couples and civil partners can usually transfer unused allowances to each other.
• This means many couples can potentially pass on up to £1 million before inheritance tax becomes payable.
• Assets above the available allowances are generally taxed at 40%.

Until the planned changes take effect, unused pension assets typically sit outside the estate for inheritance tax purposes. From April 2027, that treatment is expected to change, potentially increasing inheritance tax exposure for many business-owning families.

For business owners who have built succession plans around pension-held commercial property, the proposed changes may require a complete review of their estate planning strategy.

Many firms have spent years structuring ownership arrangements to ensure that children or other family members can inherit and continue running the business. New inheritance tax liabilities could create funding pressures at exactly the point when the next generation is trying to take control.

Without careful planning, families may be forced to make difficult decisions about assets that are fundamental to the operation of the business.

The pension inheritance tax changes are not the only development affecting family businesses.

Changes to Business Relief are also expected to reduce the level of inheritance tax protection available on qualifying business assets. While relief will remain available, larger business interests may face increased exposure to inheritance tax compared with previous years.

Combined with other challenges facing SMEs, including increased employment costs, National Insurance changes, evolving employment legislation and wider economic pressures, succession planning is becoming increasingly complex.

Although the changes are not due to take effect until April 2027, business owners should not wait until the last minute to act.

A proactive review of pension arrangements, commercial property ownership and estate planning strategies could help identify potential risks and opportunities well before the new rules come into force.

Key areas to review include:

• Pension-held commercial property
• Business succession plans
• Inheritance tax exposure
• Available reliefs and exemptions
• Cash flow and liquidity planning
• Shareholder and partnership agreements

Every family business is different, and there is no one-size-fits-all solution. However, with significant tax changes on the horizon, obtaining professional advice has never been more important.

At FWCA, we work closely with business owners to help them understand the tax implications of upcoming legislative changes and develop tailored succession and estate planning strategies that support both their families and their businesses.

If you’re concerned about how the planned inheritance tax changes could affect your business or retirement planning, our team is here to help.

Contact Folkes Worton today to discuss your inheritance tax, succession planning and business continuity options on 01384 376 964.

Folkes Worton LLP Chartered Accountants
Accounting for the Future