The current tax rules incentivise farmers and other business owners to retain their businesses until death, allowing the assets to pass to the next generation at market (probate) value for capital gains tax (CGT). This results in a tax-free uplift of the business’s value, and when combined with 100% APR and BPR, it represents the most tax-efficient strategy. However, as people live longer, the next generation often inherits the business in their late 50s or early 60s, when they are already nearing retirement themselves. There is a compelling argument that this dynamic stifles growth in the family business economy. If the next generation were to take over the business in their 30s or 40s, they might be more driven to expand and develop it.

The proposed IHT charges can potentially be mitigated by transferring the business during the owner’s lifetime and surviving the subsequent 7-year exemption period, thereby avoiding IHT. However, this approach can trigger a capital gain, resulting in a CGT liability. This gain may be “held over” by a joint election between the donor and the recipient, effectively deferring the CGT. In this scenario, no IHT or CGT would be payable, provided the donor survives for 7 years after the transfer.

The drawback of this strategy is that the recipient’s base cost for the business is reduced by the deferred gain, meaning they inherit the donor’s CGT base cost. This leaves the recipient in the same CGT position as the original owner. Please contact us if you would like to explore this strategy further.