Inheritance Tax (IHT) has become an increasing concern for business owners as frozen thresholds and rising asset values continue to pull more estates into scope.
With unspent pension pots and certain death benefits expected to be included in IHT calculations from April 2027, succession plans may need to be revisited sooner rather than later.
While unspent pensions might sound like a purely personal matter, business owners need to understand how IHT calculations could directly influence how smoothly a company can be passed on to the next generation.
Do unspent pensions impact business succession?
Many business owners will have built succession plans around a clear split between personal wealth and business assets.
However, IHT is assessed on the overall value of an estate and bringing unspent pensions into the calculation could increase the final bill faced by beneficiaries.
There is no line drawn between what was owned personally and professionally, as anything you own will be counted as part of the value of your estate.
Higher IHT liabilities can put executors in a difficult position of needing to find cash quickly, which can place pressure to dispose of business assets that you never intended to be sold.
This can be particularly difficult for family businesses, where shares, property, equipment or other assets may be central to keeping the company running.
If those assets need to be sold or restructured unexpectedly, the operational capacity of the business can be harmed and there may be little of value left for the next generation to inherit.
There is also the risk of tension between beneficiaries if pension funds are used to settle tax while other assets are preserved for those taking over the business, as some may feel that their inheritance is being swiped to support someone else.
How do I factor in IHT to my succession plans?
Regardless of when you intend your business to pass to the next generation, you need to be keeping a close eye on your succession strategy.
Ahead of the rules changing around unspent pensions, you should determine how the value of your estate will be impacted.
Depending on your circumstances, you may need to consider lifetime transfers, changes to ownership structures, management buyouts, Employee Ownership Trusts or amendments to existing agreements.
Each option carries its own tax, commercial and personal considerations, so tailored advice is essential before any decisions are made.
Our team can help you understand how the upcoming IHT changes may affect your estate and whether your current business succession strategy remains fit for purpose.
Speak to our team to review your business succession strategy and protect the legacy you want to leave behind.
