The Changing Landscape of Family Businesses

Family owned businesses are at the heart of the UK economy. 4.8 million family businesses employ 13.9 million people and makeup 90% of all private firms. These businesses are built on strong family dynamics and a commitment to long-term success.¹

However, today’s family enterprises face increasing challenges, from economic pressures to changes in inheritance tax (IHT) laws. These factors could impact their sustainability and family business legacy.

Inheritance Tax Family Business Impacts

Ownership of a business or shares in a business are include in the estate for inheritance tax purposes. One of the biggest concerns for family business owners is the proposed inheritance tax changes set for April 2026. The limitation of relief on business property could have a significant financial impact.

Under the proposed new rules, a 20% inheritance tax will be applied to business assets exceeding £1 million. This change will make it harder for businesses to pass ownership through generations. Many families fear this could lead to the sale of assets held or even parts of the business. This would be necessary to cover inheritance tax liabilities, putting the future of family business management at risk.¹

What Defines a Family Business?

There’s no official legal structure for a family business. Regardless of how a company is registered, it’s typically recognised as a family business if:²

• The majority of ownership is held by the founder, their family, or direct heirs.
• At least one family member is actively involved in business management.
• In listed companies, the founder or their family owns at least 25% of voting rights.

Family businesses are unique because personal and professional lives are closely connected. This close connection creates challenges that other companies may not face. Often, the "family" aspect itself is the biggest source of complexity in managing the business.

Balancing Personal and Business Finances in Family Businesses

One of the biggest challenges in family business dynamics is managing finances. Business and personal wealth can become entangled without clear boundaries. This can lead to financial complications and family conflicts.

Decisions about reinvestment, dividends, and financial growth can create tension. Especially when different family members have different financial goals. Some may want immediate payouts. While others prefer reinvesting profits to strengthen the business’s future.

Family relationships can influence financial decisions. This often makes discussions more emotionally charged than in non-family businesses.

To ensure stability, it’s essential to:

• Establish clear financial policies that separate personal and business assets.
• Set up a formal governance structure, such as a board of directors. This board should include non-family members to bring objectivity.
• Have a succession plan in place to ensure long-term sustainability.

Strategies for a Strong Family Business Legacy

To prepare for the future and maintain a strong family business legacy, families should focus on:

1. Proactive Succession Planning

Having open discussions early on helps prevent conflicts. It also ensures smooth transitions to the next generation.

2. Tax-efficient Structuring

Working with tax advisors can help reduce the impact of IHT liability and IHT charges through thorough estate planning. This includes understanding:

• Business relief and business property relief.
• Agricultural property relief.
• Inheritance tax relief for business interests and qualifying assets held within family trusts.

It's also important to understand the business value of qualifying businesses.

3. Adapting to Market Changes

Embracing digital transformation and modern business strategies helps keep family businesses competitive.

4. Seeking Professional Guidance

Estate planners and legal advisors can help secure the business’s future with strong, inheritance tax-efficient plans. They can provide detailed information on:

• Capital gains tax.
• Lifetime gifts.
• The implications of multiple trusts.

Through careful planning and adapting, family-owned businesses can navigate these challenges and sustain their legacy. They can also continue to play a key role in the UK’s economy for future generations.

Sources

1. familybusinessuk.org/autumn-budget-response-2024 
2. commonslibrary.parliament.uk/research-briefings/cdp-2022-0241