How can you pass on assets in a tax-efficient way?

It’s always a dilemma – do you hold on to your assets for a rainy day or pass them on to the next generation, ideally in a tax-efficient manner?

In the UK, we can make tax-free unlimited gifts. However, a gift of assets that have increased in value will trigger the dreaded Capital Gains Tax (CGT) on any gains, thus potentially saving Inheritance Tax (IHT) but at the expense of CGT. A trading family business qualifies for relief from IHT. In this article, estate planning partner Camilla Bishop explains the best options for passing on business and non-business assets from a tax perspective.

Why pass on the business if it is exempt from IHT?

Relief from IHT on a trading business is often only claimed when you die. However, it is worth considering passing on exempt trading assets during one’s lifetime. The benefit of a trading business is that it qualifies for Business Holdover Relief, allowing you to pass on your business to your children without incurring CGT. The downside is that it is a deferral of tax and ultimately the children will have to pay the tax instead in the future if the business is sold. In the Autumn Statement, the Government announced the first £1 million of qualifying assets will be exempt from IHT and the excess will attract 50% relief. These changes are to come into force from 6 Apil 2026.

Gifting your business also means losing control. If you want to retain control of the business, it is worth considering the use of a family trust whereby the business is held on discretionary terms for the children and protected from their position (e.g. divorce or bankruptcy) and run by you as the trustees. From 6 April 2026, the £1 million cap will apply to trading assets transferred into trust (£2 million for a married couple) limiting the amount of assets that can be put tax-free into trust. It is possible to put unlimited trading assets into trust ahead of 6 April 2026.

Spouse exemption means that the tax bill does not hit until the second death for a married couple. There is an opportunity to pass on the business after first death with the benefit of CGT uplift. The perfect solution is for the survivor to inherit the business rebased, and then to gift it on to the children at this point. If the survivor lives for 7 years from the onward gift, the succession planning has succeeded without CGT or IHT. The £1 million cap would only be relevant if the survivor failed to live 7 years, which would be the case in any event. Appropriate planning should also consider utilising the deceased’s £1 million cap on first death as the individual £1 million cap is not transferrable between spouses.

Changes to CGT

Other non-business assets may have gains and the only way to pass them on is to pay CGT (there is no holdover relief on an outright gift of non-business assets). It was announced in the Autumn Statement that there would be an increase in the main rates of CGT from 10% and 20% to 18% and 24% (aligning the rates with those for residential property) for disposals made on or after 30 October 2024.

It is possible to use a trust to defer CGT on non-business assets but only to the value of the available nil rate bands (£650k for a married couple). This might be useful in terms of transferring a second property into trust for the benefit of the children, enabling CGT to be deferred. Transferring assets can be carried out quickly and it is possible to effect the date of the gift by a simple declaration while following up with the formalities in slower time (e.g. you can declare that you hold a rental property for your children or transfer it into a family trust as of today’s date but update the Land Registry in due course).

It is accepted that the reliefs, bands and rates for IHT are unlikely to become more favourable. With this in mind, reducing your estate to the assets you need to live out your life in the manner you want to without holding on to assets you do not need is the sensible approach. This must be balanced with the need to consider your children’s position and whether loading their estates with additional assets is wise.

If you have questions or concerns about IHT or estate planning, please contact Camilla Bishop.