Over the next 30 years, the UK will experience the greatest transfer of wealth in modern history, with £6 trillion of assets passing to the next generations. Proportionately this equates to £360 billion in the Muslim community, who make up 6.5% of the population. Without advance planning, for business owners, much of this wealth will be lost in taxes, with forced sales and liquidation of cherished family businesses .
Muslim wealth & business
Significant wealth amongst Muslims in the UK has been created by entrepreneurs with a high-concentration of family-owned businesses. This relatively ‘new wealth’ is still in the hands of first- and second-generation immigrants. As such Muslims lack practical experience of succession planning, navigating the challenges of Inheritance Tax (IHT) and successfully transferring wealth to the next generations.
Impact of Business Relief reforms
Until recently, passing on a family business after death was relatively easy and ‘doing nothing’ could be an effective strategy. Trading businesses benefited from 100% Business Relief (BR) on qualifying business assets, enabling IHT free transfer and ensuring the continuity of family businesses .
However, the October 2024 budget introduced significant reforms to BR. From April 2026, the same businesses will now qualify for a reduced 50% relief, making an effective inheritance tax rate of 20% on values exceeding £1million. Many businesses will now be subject to substantial IHT for the beneficiaries on the death of the current owner. As a result, families may be forced to sell or break up their businesses to pay the IHT.
When a BR qualifying company is inherited, it is the value of the shares IHT liability will be calculated against. On a £10 million company the IHT bill could be circa £1.8 million and needs to be settled before the beneficiaries can take possession. It is in accessing funds to pay the IHT that many families will struggle because the liability is on them, not the company. Without sufficient funds outside of the business itself, families will need to access funds from within the company.
Not many companies will have the liquidity to provide such funds without selling assets, which could realise gains and corporation tax (up to 25%) on them. To compound the tax burden, dividend tax (up to 39.35%) will likely be incurred in extracting the funds from the company. A family benefiting from BR qualifying business could effectively incur additional taxes of circa £2.16 million to meet an IHT liability of £1.8 million. Therefore, even with a reduced rate of 20% IHT for business owners, the true cost of IHT could effectively be as high as 40% — the same as the highest rate of IHT. Ironically, the company shares themselves receive a ‘Capital Gains Tax (CGT) uplift’ to their market value on death making sale or liquidation the most tax efficient method of extracting funds to pay any IHT liability.
After factoring in the additional costs of liquidating assets and business disruption, there are very few businesses that would survive funding the burden of IHT liability in these circumstances leaving little option but to sell or liquidate and effectively ending the family business.
Challenges for property companies
For businesses that don’t qualify for BR, the problem is only exacerbated. Many Muslim families have invested in property lettings, with significant portfolios that have grown into the multi-millions. A £10 million property company could create a £4m IHT liability for the beneficiaries. These companies face the same challenges in extracting funds for IHT, but the issue of liquidity is only more acute in property businesses. In this scenario the deceased’s estate may choose to liquidate the property company, but with an in-specie distribution of the properties to the individual beneficiaries. The beneficiaries could then sell down the required number of properties, with minimal CGT, and fund the IHT liability.
However, if the properties are mortgaged there is the potential for liability to Stamp Duty on distribution. A liquidation not only signals the end of the family property company, but it also creates the subsequent tax burden of rental properties in individual names for family members. In any event, without careful planning, the true cost of IHT is likely to be significantly greater than 40%.
Importance of planning
Planning for IHT needs to start early. There are various options for families to explore to find the best fit for them. Contrary to belief, for property companies too, there are wider options than life insurance to cover IHT liability.
Our top tips:
- Bring the next generation into the family business sooner helps with continuity, while also giving successors time to learn the ropes and take the business forward.
- Explore a restructure of shareholdings and gifting to the next generation during lifetime.
- Transferring ownership must be assessed against realising capital gains in the process or deferring with holdover relief where available.
- Transferring ownership using corporate bond routes can provide greater flexibility for families as well as liquidity.
- Weigh up benefits of giving up ownership of assets verses retaining control.
- Consider retaining an income stream in the business verses handing over control.
With forward planning and holistic advice families can prepare not just for legacy but also for liquidity and tax efficient income options to fund lifestyle aspirations. It’s also wise to consider diversifying the family’s wealth away from the business for the long-term benefits of reducing risk and wealth preservation.
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