Labour Chancellor Rachel Reeves made changes to the Inheritance Tax (IHT) rules in the Budget on October 30, 2024, which could affect many family businesses in North Oxfordshire as they pass their businesses on to the next generation.
Currently, the tax system encourages families to keep their businesses together. If someone dies and leaves their business to their spouse or children, they don’t have to pay any tax. However, under the new rules, if you plan to pass on your business, you’ll have to pay a 20% IHT charge on anything over £1 million.
Most businesses get a break called ‘Business Relief’ (formerly known as Business Property Relief), which lets businesses be passed on without paying any IHT when the owner dies. This break is unlimited, so no matter how much your business is worth (£100,000 or £10 million), you won’t have to pay any IHT when you pass it on.
The first £1 million is free from IHT, and you’ll have to pay 20% on the amount over £1 million. This is less than the usual 40%, but it’s still higher than the free IHT that used to be the case.
For shares that aren’t listed on a recognised stock exchange, Business Relief will be reduced to 50%. This means you’ll still have to pay 20% (half of the usual 40%), but the £1 million allowance doesn’t apply to these shares.
A new rule coming into force on April 6, 2026, is causing concern among business owners. The current £1 million allowance for transferring money between spouses is no longer transferable, which means businesses will face a hefty inheritance tax (IHT) liability if a family member passes away. For example, if a £10 million family business is passed on, the remaining £9 million will be taxed at 20% (assuming the nil rate band is used), resulting in an IHT bill of £1.8 million to pay within six months.
Under the new rules, the business itself becomes liable for paying this tax. Businesses can choose to take a special dividend to cover the IHT, but this comes with an extra 38% tax charge, increasing the overall tax burden.