Passing the baton and learning the ropes – succession planning in family businesses

Succession planning has always been a cornerstone of effective family business stewardship. Ensuring a smooth transition of ownership and management between generations helps preserve both the operational success of the business and the long‑term harmony of the family behind it.

Setting the scene

Succession planning for business owners has taken on new urgency following the 30 October 2024 Budget, which introduced sweeping reforms to inheritance tax (‘IHT’). The changes to Business Relief (‘BR’) and Agricultural Relief will materially increase the IHT exposure of many family businesses from 6 April 2026, making early and strategic planning more crucial than ever.

Following the Government’s revisions to the changes in the 26 November 2025 Budget and an unexpected press release on 23 December 2025, from 6 April 2026, only the first £2.5 million of qualifying business assets will continue to benefit from 100% relief.  Any value exceeding this threshold will receive relief at only 50%, resulting in an IHT exposure.

These reforms mean that families who previously expected to pass on their business with minimal or no IHT burden may now face significant tax liabilities and potential cashflow challenges on succession. For more information, see our article: B(e) PR(epared).

Against this backdrop, families should consider structures that strengthen governance, preserve asset control, and enhance tax efficiency during transitions (for IHT purposes or otherwise). Three of the most effective vehicles are trusts, family investment companies (‘FICs’) and family limited partnerships (‘FLPs’).

Trusts – preserving wealth and continuity

Trusts remain a powerful structure for long‑term succession planning. By transferring assets—such as shares in a family business—into a trust, families can:

• Control the long‑term direction and beneficiaries of the business’ underlying wealth, helping reduce conflict.
• Protect assets against creditors or divorce, preserving the business for future generations.
• Maintain operational stability, as trustees hold legal title to shares, insulating the company from disruption upon a family member’s death.

Trusts also offer flexibility, especially discretionary trusts, where trustees can control distributions of income and capital over time to reflect evolving family needs and circumstances.

Trusts are subject to a distinct tax regime:

• Immediate IHT entry charges of 20%, periodic charges of up to 6% every ten years and exit charge at a proportionate rate (compared to the 40% rate applicable to individuals if they hold the shares in their own name on their death).
• If 100% BR applies, these rates are effectively reduced to 0%, and if 50% BR applies the rates are effectively 10%, 3% and 20%, respectively.
• Capital gains tax at a rate of 24%.
• Income tax at the “rate applicable to trusts”: 39.35% on dividend income and 45% on other income.

FICS – Control, flexibility and corporate‑style governance

FICs are particularly popular among families who are familiar with corporate structures.

Key advantages include:

• Distinct share classes (“alphabet shares”) with different rights attached to them, allowing dividends, voting rights, and director appointment rights to be allocated differently between family members.
• Ability to separate control from economic benefit, enabling senior family members to retain oversight while passing value to the next generation, and giving them the opportunity to learn the ropes of the business in a controlled manner.
• Profits are subject to corporation tax and dividends received by individuals are taxed at their own income tax rates for dividend income (up to 39.35% for additional‑rate taxpayers).

FICs can be tailored to meet a family’s long‑term governance and wealth‑transfer goals in a corporate environment which many business owners understandably find familiar and accessible.

FLPs – Balancing control and protection

FLPs offer a hybrid structure that combines elements of trusts and companies.

In a typical FLP:

• Senior family members act as general partners, retaining control over management.
• Younger or more passive family members become limited partners, sharing in profits without involvement in daily operations of the business.
• Each partner holds their own capital account, ensuring clarity, fairness and preservation of capital rights.
• Transition of ownership is smooth, as the management can gradually be transferred to the next generation without significantly impacting leadership and management.

FLPs provide strong asset protection, particularly useful where the business may face legal challenges related to the business’ operations or where family members may have unrelated financial exposure.

There are also tax efficiencies with FLPs. Limited partnership interests are often valued at a discount when gifted or sold, reducing potential IHT liabilities. FLPs are tax transparent, meaning tax applies only to income received by partners.

Care is needed when setting up an FLP to ensure an unlawful collective investment scheme is not inadvertently created, making specialist legal drafting essential.

Where there’s a will, there’s a way

A will is the foundation of any succession plan and is essential for ensuring business assets pass to the right people in the right way on death.

For business owners who may not have had the opportunity (or the time) to implement any of the above structures during their lifetime, a will provides a final opportunity to pass their business assets to their chosen beneficiaries in the most tax-efficient and appropriate manner.

A relatively simple mechanism is to include a discretionary trust within the will. This allows assets that qualify for IHT relief to be held for the benefit of family members on death, providing both flexibility and protection while maximising available reliefs.

Summary

Succession planning is becoming essential for the long‑term preservation of family businesses in light of the significant and imminent IHT reforms (for more information, see our article: B(e) PR(epared)). Together with an up-to-date will, trusts, FICs and FLPs each offer distinct advantages for continuity, governance and tax efficiency.

How we can help

Each family and business is different, and our private wealth team and corporate transactional team have the technical experience to help you navigate the process and to implement the most effective and appropriate succession strategies for your specific needs.