The Autumn Budget brought clarity to many areas of tax planning, but for family-run businesses, one announcement could prove particularly challenging.
From April 2026, businesses worth over £1 million will no longer benefit from the long-standing exemption on Inheritance Tax (IHT) that has allowed families to pass down company ownership without incurring a hefty tax bill.
Under the new rules, any business shares passed down will face a 20 per cent IHT charge on the value above £1 million.
For example, if your company is valued at £10 million and the nil-rate bands have already been used, your heirs could face an IHT bill of £1.8 million.
With these changes on the horizon, many family business owners are asking the same question – should I sell my business instead of passing it on?
Why selling may be the better option
For decades, the IHT exemption for private company shares has made passing a business to the next generation an attractive option.
However, this change introduces cashflow risks for families, as they may need to find substantial sums to cover the tax bill.
This could prove especially difficult for businesses where the majority of value is tied up in assets, leaving little liquidity to settle IHT.
Selling the business outright, rather than passing it down, eliminates this problem.
It allows you to realise the value of your business now, securing your wealth in a way that can be distributed more flexibly and efficiently.
However, changes to Business Asset Disposal Relief (BADR) are set to take effect from April 2025, meaning that the tax advantages for business owners are gradually being reduced.
Currently, qualifying gains are taxed at a rate of 10 per cent on the first £1 million, but this will increase to 14 per cent in April 2025 and 18 per cent in April 2026.
For example, a business sold for £2 million today would incur £100,000 in tax under the current BADR rate.
By April 2026, that same sale could cost £180,000 in tax, assuming no other changes.
These incremental increases may not seem dramatic at first glance but can have a substantial impact on the final amount retained by you and your family.
With changes not set to come in until April, there is still a limited window to take advantage of the more favourable rate before the relief tapers off.
Planning your exit strategy
If selling your business is the right choice for your circumstances, careful planning will be key to achieving the best outcome.
Buyers will be looking closely at how your business is adapting to broader challenges such as rising labour costs, increased Employers’ National Insurance, and inflationary pressures.
Preparing financial forecasts and demonstrating how your business can remain resilient will help secure a favourable valuation.
For further advice on managing the sale of your business in light of these changes, please speak to our team today.
