As a family business owner, successfully passing your business on to your family may be a key focus of your succession plans. In this article, we briefly consider how proposals within the 2024 Autumn Budget (Budget) for future tax changes favour bringing your family into the ownership structure of your business earlier. We also explain how you can retain control of your business by putting in place or updating your business' constitution (i.e. a shareholders' agreement and articles of association for family companies or a partnership agreement for family partnership businesses).
Key Budget proposals impacting succession management
Among many future tax changes proposed by the Budget, you may be aware of the proposed changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) – types of inheritance tax (IHT) relief – which take effect from April 2026:
- the full 100% rate of relief from IHT on qualifying business and agricultural assets (which includes shares in an unquoted company) will be restricted to the first £1,000,000 per individual; and
- above £1,000,000, there will be a 50% rate of relief from IHT on qualifying business and agricultural assets.
The Government intend to publish a technical consultation early this year to provide further clarification on the application of the allowance to lifetime transfers into trusts and charges on trust property.
It is anticipated the Budget's proposals to APR and BPR will encourage earlier gifting of business interests, whether this is by gifting business assets, transfer of shares or bringing the next generation into partnership to mitigate against their exposure to IHT.
As a business owner you may be wondering what types of legal mechanisms you can have to keep control of your business whilst making changes to your ownership structure, which we briefly consider below.
Your business' constitutional arrangements – a quick outline
It is essential for your business to have a written constitution in place and for this to be reviewed and updated from time to time – this operates as a route map, providing clarity to owners on how your business is run and helps avoid dispute further down the line.
You may wish to see our previous articles where we explore the importance of articles of association and shareholders' agreements for companies and partnership agreements for partnerships.
How a constitution can avoid things going wrong
When assisting you to put in place or update your business' constitution, we can consider several mechanisms with you to help avoid issues arising when making changes to your ownership structure:
- Consent matters: it would be usual to include consent rights so that key decisions require the consent of a certain individuals or percentage of the business owners. Such key decisions typically include operational matters (for example limits on capital spend and financial thresholds for contracts above which consent is needed) and structural matters (for example, restrictions on dealing with share capital, acquiring shares, admitting a new partner or changing the business' constitution);
- Restrictions on transfer of business interest: for businesses operating as a company, we can consider restrictions being placed on the transfer of shares. Mechanisms can be included so a shareholder who wishes to transfer their shares to a third party must first offer their shares to the existing shareholders. This has the benefit of preserving an existing balance of power and preventing shares from freely being transferred to a third party;
- Voting restrictions: for companies, it is possible to create multiple share classes with different voting or dividend rights attaching to such shares. This could restrict voting control to those with a certain class of shares;
- Meetings and information rights: your business' constitution will typically outline who must be present for a meeting to be valid (whether a director or shareholder meeting for a company or a partner meeting for a partnership). As an existing owner, your presence may still be required for a meeting to be valid so you are still involved in decision making. You can also require that certain key information is provided to the business owners, so if you have a less active role in the running of the business you have a contractual right to key information; and
- Restrictive covenants: if a business owner leaves, this may put the business in a vulnerable position. To protect your business, business owners can be made subject to covenants that apply whilst they hold an interest in your business and for a certain period of time after they leave the business. These covenants can include anti-compete and non-poaching of key customers/clients or employees provisions.
At the same time as updating your business' constitution it is important to ensure that the business' owners Wills are in place or updated so both align.
Please get in touch to discuss further
The Budget presents challenges for family business owners and reinforces the need to consider ownership structures and succession plans. At Trowers & Hamlins, our corporate and private wealth teams have extensive experience working together and with your accountant to put in place or update a business' constitution and ensure such arrangements align with their Wills.
We would be happy to explore this further with you to discuss how we can assist.
