Important Update for Business Owners with Pension Assets

At Rosebridge, many of our clients have successfully used pensions, whether a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), as part of their financial and succession planning. In recent years this has been an attractive route, particularly for business owners looking to hold or transfer business assets in a tax-efficient way.

However, with significant changes to Inheritance Tax (IHT) rules on the horizon, this planning approach could now carry serious risks if left unreviewed.

 

Why have business owners used pensions in this way?

Since 2015, when the punitive 55% exit charge was abolished, pensions became a powerful IHT-free vehicle to pass wealth to the next generation. For example, many business owners placed assets such as commercial premises, often selling them into the pension fund.

This strategy offered important advantages:

• IHT exemption for business premises (compared to only 50% relief if held personally)
• Capital released back into the business on sale of property to the pension
• Rental income directed into the pension wrapper tax-free, while remaining deductible for the business

The 2023 abolition of the pension lifetime allowance made this approach even more compelling.

 

What is changing, and why this matters now

Two major reforms will significantly reduce the effectiveness of this planning:

1. From April 2026
   • Business Relief (BR) and Agricultural Relief (AR) will be capped at 100% on the first £1m of qualifying assets and 50% thereafter.
   • Premises let to your own company already qualify for only 50% relief, and that restriction will remain, even within the new £1m limit.

1. From April 2027
   • IHT will apply to residual pension funds on death (regardless of age).
   • BR and AR will not apply to assets held inside a pension.
   • For beneficiaries, if the owner dies after age 75, income tax on withdrawals will also apply, creating a potential effective tax rate of up to 67% before funds reach their hands.

This could mean that on death, valuable assets such as business premises may need to be sold just to cover the tax bill, jeopardising the continuation of the family business.

 

What should business owners do?

If you hold business assets in a pension, now is the time to review your planning. Key steps include:

• Identify: Which assets are currently held in SIPPs or SSASs.
• Review: Would BR or AR apply if those assets were held personally?
• Consider:
  • Extracting assets from the pension into personal ownership.
  • Using Potentially Exempt Transfers (PETs) to pass assets directly to the next generation.
  • Restructuring ownership to optimise succession planning.

 

What are the options for extraction?

• The simplest route is often for the business owner or trading entity to repurchase the assets from the pension.
• Care is needed to:
  • Ensure market value is paid (to avoid unauthorised payment charges).
  • Manage valuation, SDLT, and potential income tax charges.

• Professional advice is essential to avoid pitfalls.

 

Do not overlook the simplest option

While restructuring pensions and business assets can be effective, let’s not forget that sometimes the simplest, most cost-effective solution is life cover written in trust. For clients in good health, this can provide the liquidity needed to settle an IHT liability without forcing the sale of business assets, ensuring the business can continue in the family’s hands.

 

Next steps with Rosebridge

With these IHT changes fast approaching, it is crucial to act early. If you have business assets held within a pension, we strongly recommend reviewing your Wills, succession plans, and pension structures without delay.

Rosebridge is here to help you navigate the complexities and protect both your business and your family’s future.

For tailored advice on IHT, business succession, or pensions, please contact us today.

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010
Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141
Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

 

Please Note

The Financial Conduct Authority does not regulate estate planning, tax advice, wills, or trusts. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028, unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases, and reliefs from taxation may be subject to change. This article is for information only and does not constitute advice.