How Lifetime Gifting Can Help Family Businesses Survive the 2026 Inheritance Tax Changes

Why wait for the future to pass on your wealth? Lifetime gifting can be smart, generous, and tax-efficient, allowing you to share what you’ve worked hard for while you’re still here to enjoy the impact. Whether it’s helping children onto the property ladder, funding a grandchild’s education, or giving a meaningful gift to a loved one, making gifts during your lifetime offers both emotional rewards and potential financial advantages. But, like all good things, it’s best done with a plan.

From 6 April 2026, major changes to Business Property Relief (BPR) under the UK Inheritance Tax regime will put family businesses at increased risk of large tax liabilities. Under the new rules, only the first £1 million of qualifying business assets per individual will be eligible for full 100% BPR. Any value above that threshold will only get 50% relief—so the remaining 50% is taxed at the standard IHT rate of 40%, resulting in a 20% effective tax on that excess value.

One of the most effective strategies for minimising exposure to these changes is lifetime gifting. But while the potential tax benefits are significant, the process demands careful legal planning and structuring.

Understanding the Power of Lifetime Gifting

What It Is:

Lifetime gifting involves transferring business assets or shares to successors during the owner’s lifetime. If structured correctly and the donor survives for seven years, the value of the gift is excluded from their estate for IHT purposes under the Potentially Exempt Transfer (PET) rules.

How It Helps:

• Escapes IHT entirely: After 7 years, the gifted asset no longer forms part of the donor’s taxable estate.
• Locks in current BPR rules: By gifting before the April 2026 changes, the asset may still qualify for 100% BPR—even if it exceeds the new £1m threshold.
• Spreads family ownership: Gifts can help gradually transition ownership across multiple family members or generations.

Trade-Offs and Practical Considerations

While powerful, gifting is not without risk:

• Loss of income: Transferring shares typically means losing dividend rights—a key source of income for many business owners.
• Loss of control: Unless voting or control rights are retained (e.g. through alphabet share structures or trusts), the donor may lose decision-making power.
• Seven-year survival requirement: If the donor dies within seven years, the gift becomes taxable (though taper relief may reduce the liability).
• Complex valuation issues: HMRC may challenge the value of the gift if not backed by a robust, independent business valuation.

The Legal Work Involved

Successful lifetime gifting requires detailed legal and financial planning, usually involving the following:

1. Business Valuation

• A qualified accountant or tax adviser should produce a professional valuation of the business or shares being gifted.
• This supports tax compliance and prevents HMRC disputes over gift values.

2. Share Reorganisation and Structuring

• To retain control or income, lawyers may restructure the company with alphabet shares (e.g. non-voting vs voting shares).
• The company’s Articles of Association and Shareholders’ Agreement may need amendments to reflect these changes.

3. Drafting the Deed of Gift

• A Deed of Gift must be drafted to formalise the transfer.
• HMRC forms (e.g. IHT100) may be required if the gift is into a trust or exceeds certain thresholds.

4. Board Resolutions and Register Updates

• The company must pass board resolutions approving the share transfer.
• The Register of Members must be updated and the confirmation statement filed with Companies House.

5. Consideration of Trusts

• Gifting shares into a trust allows control and income to be managed by trustees, offering flexibility and asset protection.
• However, trusts are subject to different IHT rules and may still trigger an immediate 20% IHT charge on amounts over the nil-rate band (£325,000).

6. Tax Reporting and Compliance

• Gifts need to be recorded for IHT and Capital Gains Tax (CGT) purposes.
• Lifetime gifts of business assets often qualify for Hold-Over Relief, deferring CGT until the asset is sold.

7. Will Review and Coordinated Estate Planning

• Once gifting is done, the donor’s will must be updated to reflect the new ownership structure and avoid duplication or omissions.
• Cross-option agreements may also be used in conjunction with life insurance to protect the business from future tax risks.

Best Practice Tips

• Start early – Waiting until 2026 could eliminate key advantages.
• Gift gradually – A phased approach avoids control issues and manages tax exposure.
• Use trusts where appropriate – They offer greater flexibility, especially for minor children or long-term planning.
• Get advice from a multidisciplinary team – Include solicitors, tax advisers, accountants, and possibly corporate finance experts.

Conclusion: Gifting as a Pillar of IHT Strategy

Lifetime gifting can be a cornerstone of effective inheritance tax planning for family-owned businesses, especially ahead of the 2026 changes. But to succeed, it must be grounded in careful legal structuring, sound tax advice, and tailored governance solutions.

Those who act early have the greatest chance of preserving family wealth, protecting business continuity, and navigating the new IHT landscape with minimal disruption.

Call us on +44 (0)1444 708 640, email us on wewillhelp@jonathanlea.net or contact us for a confidential, no-obligation consultation.

 

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited. 

 

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