Recent tax changes have made succession planning more complex for owner-managed businesses. Understanding the available options can help you advise clients before important decisions become more difficult.
Succession planning for an owner-managed company involves more than deciding who will inherit the shares. Business owners must consider inheritance tax (IHT), capital gains tax (CGT), family control, retirement income and the future management of the company.
Changes to Business Property Relief (BPR) and Business Asset Disposal Relief (BADR) have increased the importance of reviewing existing arrangements.
In a recent webinar, tax specialist Peter Rayney examined the implications of recent Finance Acts and the practical options available to business owners.
His central message was that succession planning requires a coordinated approach to tax, ownership and family circumstances. A strategy that reduces one tax liability may introduce other complications.
1. Business Property Relief: Why Existing Succession Plans Need Reviewing
Business Property Relief has traditionally played an important role in passing family trading businesses between generations.
For qualifying businesses, BPR can reduce the inheritance tax exposure associated with transferring business assets or shares.
However, recent reforms mean that advisers can no longer assume unlimited relief will apply to every qualifying shareholding.
During the webinar, Rayney examined the revised BPR framework, including the allowance available for qualifying business property and the treatment of value exceeding that allowance.
This has particular implications for owners of valuable private trading companies.
A shareholder who previously expected to retain their shares until death may now need to reconsider that approach.
For accountants, the starting point is to review:
- The current value of the owner's shareholding.
- Whether the company meets the conditions for BPR.
- The potential inheritance tax exposure under the revised rules.
- Whether transferring shares during the owner's lifetime would be appropriate.
- The owner's continuing financial needs and desired level of control.
The distinction between a trading company and an investment company is especially important. Reliefs available for qualifying trading businesses may not extend to companies primarily holding investments.
2. Gifting Shares During an Owner's Lifetime
One succession strategy discussed by Rayney is the lifetime gift of shares to the next generation.
Rather than retaining ownership until death, a business owner may transfer some or all of their shares to children or other family members.
For inheritance tax purposes, an outright gift to an individual may qualify as a potentially exempt transfer (PET).
Generally, if the donor survives seven years after making a qualifying gift, that gift falls outside their estate for inheritance tax purposes.
However, the seven-year rule is only part of the picture.
A gift of shares can also create a capital gains tax issue because transfers between connected individuals are generally treated as taking place at market value.
For qualifying business assets, hold-over relief under Section 165 of the Taxation of Chargeable Gains Act 1992 may allow the gain to be deferred.
This can make lifetime gifting a useful succession option, but the relevant conditions must be satisfied.
Rayney also highlighted the importance of considering what happens if the donor dies within seven years.
The availability of BPR and the recipient's continued ownership of the shares can become particularly significant.
Practical takeaway: Before recommending a lifetime gift, consider the CGT treatment, inheritance tax consequences, ownership conditions and the client's ability to relinquish control.
3. Family Discretionary Trusts: Balancing Tax Planning and Asset Protection
Direct gifts are not always suitable for every family.
An owner may wish to transfer business wealth while retaining some influence over how assets are managed or distributed.
Family discretionary trusts provide another possible route.
Rayney discussed their role in succession planning, particularly where asset protection and flexibility are important.
A discretionary trust may be worth considering where:
- Children are not yet ready to manage substantial assets.
- The family wishes to protect wealth for future generations.
- The business owner has concerns about beneficiaries' personal circumstances.
- The family needs flexibility over future distributions.
However, trusts introduce their own tax considerations.
Transfers into discretionary trusts can trigger inheritance tax charges, while the trust may also face periodic and exit charges.
Capital gains tax treatment must also be examined.
The appropriate structure depends on the assets transferred, available reliefs and the family's objectives.
The key question is not simply whether a trust saves tax, but whether its additional control and protection justify its costs and obligations.
4. Family Investment Companies: An Alternative Structure for Family Wealth
Family investment companies (FICs) have attracted increasing attention as a way of managing family wealth.
Rayney explained that a family investment company is not a separately defined statutory entity. It generally describes a company established to hold and manage investments for family members.
A FIC may allow different family members to hold different classes of shares, with ownership and control structured according to family objectives.
This can be useful where parents wish to retain decision-making authority while transferring some future economic value to younger generations.
However, a family investment company should not automatically be treated as a substitute for a discretionary trust.
The two structures have different tax consequences, administrative requirements and ownership characteristics.
Importantly, a company primarily holding investments will not necessarily qualify for the business tax reliefs available to a trading company.
Before recommending a FIC, accountants should examine the source of funds, proposed share structure, tax treatment and longer-term succession objectives.
5. Company Share Buybacks as a Succession Planning Tool
Not every owner wants to transfer their entire shareholding to the next generation without receiving payment.
Some need to extract value from the company to fund retirement.
A company purchase of its own shares, commonly called a share buyback, may provide an exit route.
Under this arrangement, the company purchases shares from an existing shareholder, potentially allowing the remaining shareholders to increase their relative ownership.
Rayney examined the circumstances in which a purchase of own shares may receive capital gains tax treatment rather than being treated as an income distribution.
The distinction can have significant tax consequences.
Capital treatment is subject to specific statutory conditions, including requirements relating to the purpose of the purchase, the shareholder's interest and the benefit to the company's trade.
Company law requirements must also be satisfied.
For family businesses, the structure can be attractive where one generation wishes to retire and another intends to continue running the company.
However, a share buyback should not be assumed to qualify automatically for favourable capital treatment simply because it supports succession planning.
Advisers should assess the proposed transaction carefully and consider whether HMRC advance clearance is appropriate.
6. Business Asset Disposal Relief and the Timing of an Exit
Business Asset Disposal Relief can affect the tax payable when qualifying business owners dispose of shares.
In the webinar, Rayney also discussed the October 2026 Budget announcements and their implications for planned disposals.
He highlighted a proposed reduction in the lifetime gains limit qualifying for BADR, from £1 million to £500,000, with effect from 6 April 2027.
For accountants advising shareholders approaching retirement, the important issue is how changes to BADR could affect the net proceeds of an exit.
The timing of a transaction can matter, but it should not override the commercial and family objectives of the succession plan.
Any proposed disposal should be reviewed alongside the client's retirement requirements, the company's financial position and the relevant tax conditions.
What Should Accountants Do Next?
Succession planning is rarely a single transaction.
A business owner may need to combine lifetime gifts, trusts, changes to share ownership and a structured retirement exit.
The appropriate approach depends on the family's circumstances, the company's assets and the owner's longer-term intentions.
For accountants, five questions provide a useful starting point:
- What is the current value of the business, and what inheritance tax exposure could arise?
- Does the company qualify for the relevant business tax reliefs?
- Is the owner ready to transfer ownership, control or both?
- Does the owner need to extract capital to fund retirement?
- Would direct gifts, trusts, a family investment company or a share buyback better meet the family's objectives?
Addressing these questions early gives clients more opportunity to assess their options and obtain specialist advice where necessary.
Frequently Asked Questions About Succession Planning for Owner-Managed Companies
What is succession planning for an owner-managed company?
Succession planning is the process of arranging how ownership, control and management of a company will pass to another person or group.
For an owner-managed business, this often involves transferring shares to family members, preparing the next generation to manage the business or arranging an exit for retiring shareholders.
Accountants must consider inheritance tax, capital gains tax, company law and the owner's financial needs. A suitable succession plan should address both the tax consequences and the practical future of the business.
How do changes to Business Property Relief affect family businesses?
Business Property Relief can reduce inheritance tax on qualifying business assets and shares. Recent reforms restrict the availability of full relief for higher-value qualifying business property.
This means owners of valuable trading companies may face an inheritance tax exposure that earlier succession plans did not anticipate.
Accountants should review share valuations, business eligibility and the potential consequences of retaining shares until death. The precise tax outcome depends on the applicable legislation, available allowances and individual circumstances.
Can a business owner gift company shares to their children without paying tax?
A business owner may be able to gift shares to their children without an immediate capital gains tax payment, but this depends on the circumstances.
A gift between connected persons is generally treated as a disposal at market value for CGT purposes. However, qualifying business shares may be eligible for hold-over relief under Section 165 TCGA 1992.
For inheritance tax, an outright gift to an individual may qualify as a potentially exempt transfer. The seven-year survival rule and other relevant conditions must be considered.
Is a family investment company better than a discretionary trust?
Neither structure is automatically preferable.
A family investment company may offer flexibility over share ownership, investment management and voting control. A discretionary trust may be useful where trustees need flexibility over which beneficiaries receive assets and when.
The structures have different inheritance tax, capital gains tax and ongoing administrative implications.
The decision should reflect the family's objectives, the assets involved and the level of control the business owner wishes to retain.
Can a company buy back shares from a retiring owner?
Yes. A company may be able to purchase shares from a retiring shareholder, subject to company law and tax requirements.
A purchase of own shares can help facilitate succession where the retiring owner needs to receive value for their shareholding.
However, the tax treatment depends on whether the transaction satisfies the conditions for capital treatment. Otherwise, income distribution treatment may apply.
Accountants should consider the commercial purpose, shareholder position, company funding and relevant HMRC clearance procedures before proceeding.
Why should business owners review succession plans following recent Finance Acts?
Changes to inheritance tax and capital gains tax reliefs can affect the cost of transferring a business or retiring from ownership.
A succession strategy developed under earlier rules may no longer produce the same outcome.
Business owners should review their shareholdings, available reliefs, retirement objectives and intended beneficiaries.
Accountants can help identify where existing plans need updating and whether alternative arrangements merit further consideration.
Watch the CPDStore Webinar
For a more detailed examination of the tax and practical considerations, watch Peter Rayney's CPDStore session:
Succession Planning for the Owner-managed Company After Recent Finance Acts — October 2026
The webinar examines Business Property Relief, lifetime share gifts, family discretionary trusts, family investment companies, purchases of own shares and recent Budget developments affecting succession planning.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
