Posted: 17 / 01 / 2025
Succession Planning 2025: A Year of Tax Changes and Inheritance Strategies
As the new year begins, thoughts often turn to giving – not just celebrations but the long-term gifts of wealth and security for future generations.
Given the changes announced in the Autumn Budget 2024, lifetime gifts should be considered part of wider, proactive succession planning to manage future inheritance tax liabilities on death alongside other strategies to ensure that assets are passed on efficiently and in line with personal wishes.
This article is a timely reminder of what you should be thinking about at the start of this year.
The Budget’s Gifts: Key Inheritance and Capital Gains Tax Changes
At the end of October, The Chancellor announced a number of measures which included changes to Inheritance Tax (IHT), Capital Gains Tax (CGT), and Business Reliefs. As a reminder, the three key changes impacting succession planning were:
Agricultural and Business Reliefs: Navigating the 2026 Threshold Changes
From 6 April 2026, the existing 100% BPR & APR will be capped at £1m of combined value in an estate. Where the combined value of an estate exceeds this threshold, a reduced rate of 50% will apply, an effective rate of 20%.
Business Asset Disposal Relief (BADR): What You Need to Know for 2025 and Beyond
For disposals made on or after 6 April 2025, gains eligible for BADR will be taxed at 14% and from 6 April 2026, gains eligible for BADR will be taxed at 18%.
Pensions and IHT: The 2027 Rule Changes Impacting Legacy Planning
From April 2027, undrawn pension funds and death benefits are to be included within the value of a person’s estate for IHT purposes. For those who die over the age of 75, IHT will be due on death, with income tax then due on beneficiaries on drawdown of the inherited pension fund – a 67% effective tax rate!
For more information on the Budget announcements, download our guide here.
The impact of these changes will be dependent on your personal circumstances, so it is important to review your potential IHT exposure and consider the strategies available to minimise the exposure as much as possible.
New Year’s Resolutions for 2025: Inheritance Tax Reduction Strategies
Spend it! Minimise Your Inheritance Tax by Reducing Your Estate
Some individuals prefer to enjoy the wealth they have accumulated during their lifetime, choosing to spend on experiences, travel, hobbies, or necessary expenses such as healthcare, rather than leaving these assets to be taxed after death. Furthermore, increasing the level of drawings from pensions in retirement may be considered more attractive given the changes noted above.
By reducing the size of their estate through spending, you can lower the exposure to inheritance tax however this does not generate generational wealth.
Pass it On: The Risks of Full IHT Exposure and Generational Wealth Loss
Some individuals choose to retain full control over their assets until death, viewing any resulting tax liabilities as an acceptable trade-off. This approach often aligns with those who value the ability to manage their wealth independently or who have no strong intention to transfer substantial assets, particularly if they do not have dependents or specific legacy goals.
However, this can leave beneficiaries with liquidity issues where IHT liabilities end up being significant and there are insufficient cash reserves. The choice then becomes whether families need to borrow funds, often at high interest rates or sell the family businesses or property, disrupting legacies and livelihoods.
Take Out Life Insurance: Safeguard Your Legacy Against Inheritance Tax
Going forward life insurance policies are going to be a more important consideration for owners of family businesses. Under the current rules, where a policy is written into a trust, life insurance proceeds will fall outside an individual’s estate for IHT, allowing the next generation to pay the IHT bill and keep the business going. Whole of life insurance is most usual for inheritance tax planning as the payout is certain and can be guaranteed. It is expensive, as it acts both as a savings plan and as life assurance.
The New Year’s Question: Should You Gift Assets or Wait?
By transferring assets during your lifetime, you can benefit from the seven-year rule for Potentially Exempt Transfers (PETs). Under this rule, gifts made more than seven years before death are exempt from Inheritance Tax (IHT). However, careful planning is essential to ensure that the current owners retain sufficient income and capital to meet their needs while avoiding the Gift with Reservation of Benefit rules. These anti-avoidance rules prevent individuals from retaining an interest in assets they have gifted to reduce their estate’s value for IHT purposes.
As noted above, Business Property Relief (BPR) and Agricultural Property Relief (APR) can currently offer up to 100% relief from IHT on qualifying assets. However, from 6 April 2026, new rules will reduce this rate of relief: the first £1 million will remain eligible for 100% relief, but any excess will only qualify for 50% relief. Importantly, these changes will apply to lifetime gifts made on or after 30 October 2024, where the donor dies on or after 6 April 2026 and within seven years of the gift. In such cases, the gift will become a failed PET, and the new rates will apply.
Tax-free cash gifts are often overlooked but remain a valuable tool for IHT planning. Each individual can utilise annual gifting allowances, such as the £3,000 annual exemption, and make small gifts of up to £250 per person to an unlimited number of individuals each year without incurring IHT.
Finally, Capital Gains Tax (CGT) liabilities should not be overlooked when making gifts. Business asset holdover relief remains an effective way to mitigate CGT on the transfer of qualifying business assets, ensuring that such transfers do not trigger immediate tax liabilities.
Business Succession Countdown: Prepare for Tax Changes and Secure Your Legacy
Business owners must weigh their options in light of the changing reliefs and thresholds. Succession planning isn’t just about tax efficiency – it’s about continuity and legacy. This year is an ideal time to revisit shareholder agreements, family governance structures, and succession plans to ensure your business thrives in future generations’ hands.
Family Conversations: Aligning Succession Plans to Avoid Disputes
Transparent discussions with family members aligning your and their expectations will alleviate future disputes, setting a harmonious tone for your family’s legacy planning.
Family Investment Companies (FICs): Tax-Efficient Wealth Management Solutions
FICs provide a tax-efficient way to manage family wealth, offering greater control and flexibility, it is not uncommon for FIC’s to combine a variety of ownership vehicles including a trust shareholder.
Employee Ownership Trusts (EOT): A Tax-Smart Business Succession Option
Succession dos not always mean passing to your next generation or your co-directors. EOT’s provide significant tax benefits on sale and enable a company to become employee controlled, which for certain companies is the best way forward.
Management Buyout (MBO): Ensuring Smooth Business Succession and Stability
MBOs are often used as a succession route ensuring a smooth transition to the emerging team of leaders and continued business success. Essentially, a company’s senior management team takes the lead by acquiring and running the business. This approach allows the existing owners to exit while ensuring continuity and stability within the company.
Trusts for Future Generations: A Gift to Minimise Inheritance Tax
Despite the common view that trusts can be overly complex, they can be highly effective when looking to minimise your inheritance tax exposure.
Transfers into trust are ‘chargeable lifetime transfers’ and subject to IHT at 20%; the current IHT regime applies decennial charges (a 10-yearly charge) at a rate of 6% to relevant property held within the trust.
The introduction of the new rules will see the same implications for trusts as outlined above, namely that qualifying assets with value in excess of £1 million will be subject to 50% of the decennial charge. This does, however, represent a significant saving when compared to the position for those assets as part of a death estate (3% versus 20%). Therefore, it may be advisable for qualifying assets to be settled onto trust ahead of April 2026 to take advantage of full APR or BPR on the transfer into trust. Again, consideration must be given to the Gifts with Reservation of Benefit provisions to ensure this form of planning is effective. It should also be noted that a detailed technical consultation is expected in January to confirm the application of the rules to trusts and trustees holding qualifying business or agricultural property.
Will Updates for 2025: Secure Your Estate with New Inheritance Tax Rules
Ensure your will reflects the new tax environment. Regularly reviewing and updating wills and estate plans is essential to ensure they reflect current laws and the family’s wishes. This includes considering the impact of the new IHT rules and making necessary adjustments to minimise tax liabilities.
It’s common for wills to direct assets to the surviving spouse to take advantage of the IHT exemption for interspousal transfers, however, it does not appear that the £1 million allowance will be transferable to the surviving spouse on death, to the extent that it is unused. Assuming this is the case, consideration should be given as to whether qualifying assets should be transferred to other beneficiaries (or a trust) in order to bank the allowance and ensure that it doesn’t go to waste.
Conclusion: Secure Your Family’s Future with Succession Planning Expertise
This year, give yourself and your loved ones the gift of clarity and confidence. Whether you’re navigating discretionary trusts, preparing to pass on the family business, or optimising your allowances, our team of tax experts is here to guide you. We’ll help you navigate the evolving rules and ensure your plans align with your personal and business goals.
Succession planning can feel complex, but it doesn’t have to be. From reviewing business succession plans and shareholders’ agreements to addressing the personal financial positions of key stakeholders, we’ll work with you to secure the future of your family business and its legacy for generations to come—even in a changing tax landscape.
Let us help you take control of your succession plans. Connect with our National Head of Tax Sarah Richards today to arrange a tailored planning session or discuss the upcoming tax reforms and strategies for your family business.