Passing a family business to the next generation: Inheritance Tax and succession planning

You have spent years building your family business. Naturally, you want it to move smoothly to the next generation, with the right people, protections and ownership structure in place. This is where succession planning comes into play, and Inheritance Tax is part of that conversation, but it is not the whole story.

A strong succession plan should answer three connected questions: who will own the business, who will run it, and how the family will make decisions once ownership starts to move between generations. Tax planning is important, but governance, control and family alignment are often what determine whether the plan works in practice.

This guide looks at the practical succession questions family business owners should consider.

Do family businesses have to pay Inheritance Tax?

Family businesses are not automatically exempt from Inheritance Tax. In many cases, shares in a trading business may qualify for Business Relief, which can reduce the taxable value of the business for Inheritance Tax purposes.

However, as of April 2026, the rules are less generous, particularly for higher-value businesses. This means more families may need to plan for a potential tax liability when shares are passed on, either during their lifetime or on death.

Paul Attridge, Tax Partner says: “The families most affected are often those who assumed their business qualified for full Business Relief. A business evolves over time, and assets may be acquired for a variety of commercial reasons. While each decision may be entirely appropriate in isolation, the combined effect can reduce the amount of relief available.”

How is a family business valued for Inheritance Tax?

To calculate the tax, the business first has to be valued. This is done using the market value at the date of death, or the date of a lifetime gift.

The starting point is usually the balance sheet. The executor reviews the assets and liabilities and checks that everything is shown at open market value. Property is often referred to the Valuation Office Agency for a separate view.

Certain items need to be separated carefully. Trading assets, surplus cash, investment property and other non-core assets may be treated differently, so a clear valuation can help the family understand what is being passed on, what may need restructuring, and where future ownership should sit.

The value is reported to HMRC on form IHT400, with a separate schedule, IHT413, for business and partnership interests. Good lifetime records make this far smoother later, particularly where the business holds a mix of trading assets, surplus cash or investment property.

How can you pass a family business to your children?

There is no single right answer. The best route depends on the size and value of the business, your plans for retirement, whether the next generation is ready to take control, and how much income or influence you want to retain.

Leave it in your will

The simplest route is to pass shares on death. This can work well where ownership is straightforward and the next generation is aligned, but the will should be reviewed alongside the company articles, any shareholders’ agreement and the family’s wider estate plan.

Give shares away during your lifetime

A lifetime gift can gradually move ownership to the next generation and give successors time to grow into their role. The trade-off is that you may give up income, voting power or future growth, so any gift should be considered alongside family dynamics, personal financial security and control.

Use a trust

Trusts can help you pass value down while retaining a degree of control. They may be useful where beneficiaries are not yet ready to own shares outright, or where the family wants a managed structure for future generations.

Consider freezer and growth shares

This approach “freezes” the value of your existing shares and creates a new class that captures future growth. The growth then builds up in the hands of the next generation, outside your estate. It lets you keep control and income while capping your exposure.

Look at a Family Investment Company (FIC)

A FIC is a private company designed to hold and grow family wealth and is often used as an alternative to a trust. It can pass growth to the next generation while the founder retains control through the share structure.

Funding should also be considered early. If a tax liability does arise, the family needs a practical plan that protects both personal wealth and the working capital of the business.

What else should family business owners consider when planning succession?

Now let’s move on to succession planning. There’s no single right answer for how you pass on a family business.

• Prepare the next generation – Succession rarely works if it is only documented on paper. Future owners may need mentoring, board exposure, financial education or external experience before responsibility formally passes to them.
• Agree the family governance model – A family charter, clear dividend policy, decision-making framework and defined roles can help avoid tension later, particularly where ownership is shared between active and non-active family members.
• Where will the cash come from? – If a bill does arise, your family needs to fund it without starving the business of working capital. Life insurance written in trust is a common and clean way to cover the liability.
• Keep your will and shareholder documents aligned – Your will, your articles of association, and any shareholders’ or partnership agreement all need to point in the same direction. Conflicts between them can undo careful tax planning.
• Protect your planning – Check that holding periods, company records, shareholder rights and ownership structures support your intended outcome well before any transfer is made.
• Review the succession plan regularly – HMRC is scrutinising the “wholly or mainly trading” test more closely than before. A business that qualified five years ago may not qualify today. A periodic health-check keeps you ahead of any drift.
• Consider a family office – David Horowitz, Partner, Head of Gerald Edelman Wealth says – “A family office is not for everyone, and it would be wrong to suggest otherwise. If your wealth is straightforward, held in one or two places, and well served by your existing advisers, a full family office is unnecessary and simply adds cost. It earns its place when the family becomes multi-generational, the assets span several structures and jurisdictions, and coordination – tax, investments, governance, succession – becomes a job in its own right.”

How can Gerald Edelman help?

At Gerald Edelman, we help families look at the full picture, from Business Relief and valuations to succession planning, gifting, trusts and family investment companies. Our Wealth Management team can also help plan for any future liability.

For owners who are concerned with the immediate impact of the 2026 reforms, our recent article, The new Inheritance Tax rules for business owners, looks at the cashflow, valuation, liquidity and sale-planning implications in more detail.

If you would like to understand how Inheritance Tax could affect your family business, or get started in succession planning, please get in touch with our team.