Why the Brits are following the non-doms and leaving the UK

For many years, there has been little debate over whether maintaining continuity in family-owned trading businesses-with some built up over multiple generations- is beneficial for the economy. The established argument is that enabling such businesses to be passed down to successors following the death of the previous generation allows them to keep operating, retaining and employing staff, and generating recurring tax revenues, with limited disruption following the death of a shareholder.

If inheritance tax (IHT) charges apply to a business, or business asset, upon the death of an owner, the surviving generation has to find the money to pay the tax. Often, this can only be done by selling the business itself, or alternatively, placing the effective burden of the tax bill on the business going forward, as future profits are earmarked to settle tax instalments or debt financing payments due.

In the Autumn Budget 2024, the government announced that the IHT relief, relied upon by many family businesses, was to be limited significantly. On a trading business worth £10m, the surviving family has gone from the expectation of potentially paying no IHT, to a tax charge of up to £1.8m where the sole owner dies after 5 April 2026.

It is unusual in the current economic climate that a trading company owned by an individual or family will have £1.8m cash available. Somewhat ironically, prudent business owners who retain surplus cash in a company to help fund an IHT bill could inadvertently exacerbate the issue and increase the IHT due. But even where a business does hold such levels of cash, and a dividend could be paid to cover the IHT, this leads to a further tax charge, as income tax is due on the dividend paid.

This significantly increases the effective cost to the business to cover such a liability. If we assume tax is paid at the highest rate, a dividend of over £2.9m is required: more than £1.1m to pay the income tax on the dividend, and £1.8m to pay the IHT.

Due to the way the IHT regime has worked for around 50 years, potentially providing full IHT relief on death for qualifying assets, the shares in many family businesses are currently owned by the oldest family members, who may now be in their 70s or older.

When faced with the issue of how to fund an impending IHT bill, we are seeing an increasing number of British entrepreneurs opting to explore a different route. Some are considering leaving the UK as a potential solution to the tax issue. This may be effective for some individuals, but for older business owners, overseas relocation presents challenges, as they need to be non-UK resident for at least ten years, and restructure their business ownership, before their shares fall outside the UK IHT regime. This situation may lead entrepreneurs to explore selling businesses which have been built up over a lifetime, and which were expected to provide for future generations.

With increased exposure to IHT, there is less incentive for British entrepreneurs to pass their businesses on. Instead, a sale to a third-party, management, or even indirectly to the company’s employees, may make more sense. As a result, selling the business sooner is likely to become a more popular and tax-efficient option. The danger is that business sales can also be a driver for entrepreneurs to explore a move overseas, as they may seek to leave the UK and cease to be UK tax resident prior to a sale.

The Chancellor could therefore face a difficult balancing act in the months ahead, as she may need to raise additional tax revenues, while ensuring entrepreneurial taxpayers are not motivated to leave for sunnier and more tax incentivised shores.