Business succession planning has always been a central consideration for owners, especially in family-owned and founder-led enterprises. From inception, many business owners envision a time when they’ll step back or hand over control, with a clear transition pathway often part of the initial strategy. This may involve passing the reins to family members, selling to a third party, or facilitating a management buyout. However, recent changes in the UK budget have introduced new considerations, particularly for family-owned businesses, making the already complex area of succession planning even more nuanced.
With increased inheritance tax levies on business properties and farms, higher capital gains tax rates, and the abolition of the non-domiciled (non-dom) tax status, business owners now face a more challenging environment for succession. This article examines how each budget change could impact succession and exit planning, especially for family businesses, and presents strategies to help business owners manage this evolving landscape.
Chancellor Rachel Reeves acknowledged in her budget speech, emphasising the need to address fiscal challenges with targeted tax increases. This decision, while fiscally motivated, places additional pressures on business owners planning their succession or exit strategy.
Succession planning often takes a different shape depending on whether a business is family-owned or not. Family businesses, which often value continuity and legacy, may prioritise transferring ownership to the next generation with minimal tax impact. Non-family businesses, meanwhile, may focus on achieving optimal financial returns from a sale or buyout, often involving third parties or external management. Recent budget changes have far-reaching implications for both categories, but family-owned businesses may face more substantial impacts due to the new levies and tax adjustments.
For family-owned businesses, in particular, the financial sustainability of the next generation is a critical aspect of succession. Higher taxes on transferred assets could impact these plans, potentially reducing the capital available for investment or expansion. Meanwhile, other businesses may find the increased capital gains tax an obstacle to a smooth sale or buyout, as buyers consider the heightened costs involved.
The introduction of a 20% levy on family business properties and agricultural estates valued over £1 million and £2 million, respectively, marks a significant change, especially for family-owned enterprises. While all high-value estates are affected by this levy, farming businesses face unique challenges due to the nature of their assets and the operational demands of agriculture.
For family business properties—often consisting of commercial or investment real estate held within a family structure—this levy could create immediate cash flow issues. These properties may include commercial real estate such as office buildings, mixed-use properties with both commercial and residential uses, and investment properties that generate rental income.
Unlike liquid assets, real estate requires considerable time and market demand to sell. To meet the levy requirements, some families may feel pressured to liquidate parts of their property portfolio, potentially compromising long-term income or growth strategies.
The levy directly affects available cash flow, as a significant portion of the estate’s value must be allocated to tax payments rather than reinvestment or operational expenses. Family businesses relying on property portfolios for rental income or as a financial foundation may be forced to reallocate funds away from growth opportunities.
In some cases, these properties house core operations, such as office spaces or warehouses. Funds diverted toward tax payments may limit the ability of these businesses to expand, hire, or invest in operational improvements.
Family-owned agricultural estates, or farms, are uniquely affected by this levy due to the distinct nature of farming assets. Unlike other types of family businesses, agricultural estates often hold high-value assets in the form of land and essential machinery, both of which are crucial for daily operations and have limited liquidity.
Agricultural businesses generally operate with thin profit margins, reinvesting most earnings back into seasonal supplies, repairs, labour, and other essential costs. A 20% levy on high-value estates would require family farms to dip into already limited cash reserves or seek financing to meet tax obligations. This shift in cash flow can disrupt yearly operations, forcing farms to reduce investments in new technology, efficiency improvements, or sustainable practices that could otherwise boost productivity and competitiveness.
Agricultural land in the UK is expensive, particularly in desirable farming areas. Even smaller farms or those with mid-range land holdings can exceed the £2 million threshold simply due to high land values. As a result, even relatively modest family farms could be subject to the levy, diverting essential funds away from the farm’s operational and future investment needs.
Farming equipment like tractors, combines, irrigation systems, and processing machinery represents a significant investment for family farms. This machinery, often financed over many years, is crucial for the farm's efficiency and productivity. The levy means funds that would otherwise support machinery upkeep, upgrades, or replacement could be siphoned off to cover tax liabilities, directly impacting farm productivity.
For family farms, liquidating assets to cover tax costs is often impractical. Selling parcels of land to raise funds for the levy could lead to fragmentation of a farm estate. This fragmentation disrupts the cohesive operation of the farm, making it challenging to manage as a single, efficient unit. The loss of contiguous land can hinder crop rotation, limit grazing areas, and complicate access to shared resources like water sources or equipment storage, ultimately reducing the farm’s productivity. Similarly, selling off machinery would directly hinder operations, as each piece of equipment plays a crucial role in agricultural production. This lack of flexibility makes it challenging for farms to manage large, one-off tax payments without severe repercussions.
The budget also includes an increase in capital gains tax, with the main rate rising from 20% to 24% and the higher rate from 28% to 32%, effective from April 2025. This rate hike affects gains from disposals, such as the sale of business assets or shares, and represents a substantial increase in the tax burden on exit planning.
The higher CGT rate presents challenges for both family and non-family businesses, especially for those planning sales or transfers as part of the succession process. For business owners intending to retire by selling off part or all of their business, the increased tax rate may significantly reduce the proceeds available, impacting retirement funds or reinvestment capital for other ventures. In the case of family businesses, where ownership transfer often includes a partial sale of shares, the new rates could deter owners from finalising planned transitions. Former Conservative Chancellor Lord Clarke expressed concerns that the tax hike serves as a...
This comment supports the point that increased CGT rates may do more than complicate succession planning—they may restrict business owners’ capacity to reinvest in their workforce and sustain employment levels as they transition.
For many, this change could also affect timing. The anticipated rise in tax may encourage some owners to accelerate their exit strategy before the rates take effect in 2025, particularly if they anticipate gains from asset sales. Conversely, others may delay sales or transfers, hoping for future government relief or a reduction in CGT. This increased complexity necessitates careful planning to balance tax optimisation with the owners' financial goals and business continuity.
Over the next four years, the government plans to abolish the non-dom tax status, transitioning to a residence-based tax system. The end of non-dom status means that individuals currently benefiting from it, including business owners, will be taxed on their global income if they remain UK residents.
This change is especially relevant for internationally active business owners or those with global family members who might inherit the business. For individuals with non-dom status, this change could increase personal tax liabilities, complicating succession planning, particularly for family businesses with heirs residing overseas.
The abolition of non-dom status may drive business owners to reconsider residency arrangements and asset locations to mitigate tax impacts. Some may even explore relocating parts of their business or family trust structures outside of the UK. These decisions are complex and often involve balancing tax considerations with operational needs and family objectives, underscoring the importance of an integrated approach to succession and tax planning.
Given these substantial tax adjustments, business owners should consider proactive strategies to minimise tax liabilities and ensure smooth transitions. Below are recommended approaches for succession planning in the context of the recent budget changes:
Business owners should assess whether holding assets under trusts or family investment companies (FICs) could mitigate tax impacts. Trusts can centralise assets and allow for more efficient estate management, especially in family businesses, while FICs offer tax optimisation benefits within a corporate structure.
Transferring wealth through lifetime gifts, particularly using the annual exemption, can help reduce the taxable value of an estate over time. Given the seven-year rule, early planning and phased gifting can enable owners to reduce inheritance tax exposure without compromising business control.
Transferring wealth through lifetime gifts, particularly using the annual exemption, can help reduce the taxable value of an estate over time. Given the seven-year rule, early planning and phased gifting can enable owners to reduce inheritance tax exposure without compromising business control
Given the likelihood of further adjustments to tax policies, succession planning should be viewed as a dynamic, ongoing process. Business owners should regularly consult legal, financial, and tax advisors to keep succession plans current with legislation and optimised for their evolving goals.
Managing these budget changes requires expertise, especially for family businesses and those with international considerations. Professional advice can help owners structure their succession to achieve financial security, operational continuity, and long-term growth.
The recent budget changes introduced by Rachel Reeves mark a significant shift in the approach to business taxation and succession planning. While the Chancellor justified these increases as a necessary correction for previous economic management, the abrupt reversal on tax promises—particularly the pledge not to raise taxes—casts a shadow over the commitment to stable, long-term policy. Shifting blame onto predecessors may offer some explanation, but it doesn’t fully account for the strain these changes will place on those who have worked to establish and grow businesses over decades.
However, projections from the Office for Budget Responsibility (OBR) suggest that while there may be an initial boost in economic activity, growth is expected to slow in subsequent years. The OBR forecasts GDP growth of 1.1% in 2024 and 2% in 2025, with growth rates remaining below 2% annually up to 2029. While the budget may deliver short-term gains, it seems to undermine the promise of sustained economic resilience.
For family-owned enterprises and entrepreneurs alike, the budget’s direction imposes a substantial burden on succession and exit planning. The intention to create a fairer economy through tax reforms, while rhetorically sound, appears at odds with the punitive financial environment that many business owners now face. Those who have spent their lives building assets to pass down to future generations may well see their efforts constrained by high taxes and limited relief options, complicating the very goals of continuity and security that succession planning seeks to achieve.
At Haddletons, we recognise that every business is unique, and so are the aspirations of those who have built them. Our succession planning services are designed to provide tailored, in-depth solutions that consider not only your business structure but also your family dynamics, personal goals, and vision for the future.
Give us a call today to ensure your business legacy is protected, and your future is in capable hands.