Invest or extract: The question family manufacturers weren't expecting to ask

Walk into the offices of any mid-sized family manufacturer in the Midlands or the North, and you will find a particular kind of plan pinned to the wall. New press in bay three. CNC upgrade by Q3. A robotic cell to ease the welding bottleneck. Maybe a solar array, maybe a heat recovery system, certainly something for the energy bill. The capital expenditure plans for 2026 and 2027 have been written, costed and, in many cases, ordered. The permanent full expensing regime, and the new 40 per cent first-year allowance for main rate expenditure available from January, made the maths look attractive enough to act.

What those plans were not generally written to take into account is the fact that, since 6 April this year, the way the family will be taxed when they pass the business on has changed quite fundamentally. Business Property Relief, which for a generation has been the quiet engine of family succession in this country, is now capped. The first £2.5 million of qualifying business value per individual remains fully relieved. Anything above that gets 50 per cent relief and an effective 20 per cent inheritance tax charge. A couple, with planning, can shield up to £5 million between them. For a successful manufacturer worth £15, £25, £50 million, that is a meaningful number.

This is not a small change. It is, in succession terms, the most significant rewrite of the rules since BPR was introduced in 1976. And while a lot of column inches have been spent on what the new regime means for farming families, the implications for owner-managed industrial businesses have had far less airtime, partly because manufacturers tend not to mobilise around tax in the same public way, and partly because the structural impact is more subtle.

Consider the position of an owner of a £20 million precision engineering firm built up over three decades. Under the old rules, they could die tomorrow and the business would pass to the next generation with no inheritance tax to pay on it. Under the new rules, assuming a married owner with both spouses' allowances available, around £15 million of value would now sit above the relief threshold. At an effective 20 per cent, that is a £3 million tax bill. Inheritance tax on qualifying business assets can be paid over ten years, interest-free, which softens the cash flow impact. But three million pounds of tax that nobody planned for, set against a business that has been reinvesting profits rather than throwing off dividends, is the kind of number that has to come from somewhere. In practice, it usually comes from the business itself.

That is where the strategic problem starts to bite. The cash to pay the tax has to be extracted from the company, with all the income tax friction that implies. Or the business has to be sold, in part or in whole, by the next generation in order to settle the liability. Or the business has to borrow against itself, at interest rates that are no longer cheap. None of these are catastrophic outcomes, but none of them are what most founders had in mind when they spent thirty years saying yes to one more press, one more bay, one more apprentice.

And here is where the picture gets uncomfortable. The same government that has tightened the BPR regime has also been encouraging manufacturers, quite reasonably, to invest. Full expensing gives companies a 100 per cent first-year deduction on most new plant and machinery, with no cap on spend. The new 40 per cent first-year allowance, available from January, plugs some of the gaps where full expensing did not reach. The Modern Industrial Strategy carved out advanced manufacturing as one of the eight priority sectors. From 2026, the discount on industrial network charges for energy-intensive users has risen from 60 to 90per cent. The policy direction, taken in isolation, is the most pro-investment manufacturing has seen for some time.

The problem is that investment, in the tax sense, builds up exactly the kind of business value that the new BPR regime now exposes. A new £2 million production line will sit on the balance sheet for a decade or more. A £5 million automation programme, financed out of retained profits, makes the company more valuable, more competitive, more resilient. It also, on the founder's death, makes the inheritance tax bill larger. The two policy levers, taken together, pull in opposite directions for the family-owned business with succession on the horizon.

For most owners this does not change the answer. Standing still in 2026 is not a viable strategy. The cost pressures are too severe and the demand environment too uncertain. UK industrial electricity prices remain among the highest in the developed world. US tariffs of 10 per cent on most UK goods, and 25 per cent on steel and aluminium products, have already taken a measurable bite out of export volumes. The latest Make UK quarterly outlook shows weak domestic demand, hiring freezes in half of all manufacturers, and redundancies under consideration in over a quarter. Investment in productivity is not optional in that environment. The firms that emerge stronger from the next five years will be the ones that automated, decarbonised and digitised through it, not the ones that waited it out.

But the conversation around the kitchen table now has to include a question that previously sat in a separate folder, brought out once a decade. It is no longer enough to know what the business is worth in the abstract. The family needs to know what it is worth on the open market, on a forced sale, and on the balance sheet, because each of those numbers now interacts with the tax position. It is no longer enough to assume that the children, or the management team, will simply take it on. The structure of the handover, whether by gift, by trust, by phased buy-out, by employee ownership trust or by trade sale, has implications that compound over years.

This is, in other words, less a tax problem than a strategic one. The right answer is not to stop investing. It is to make capex decisions, ownership decisions and succession decisions inside the same conversation, rather than in separate ones held years apart. A £3 million automation programme might still be the right call. So might bringing the next generation into ownership now, while the business is at a value where the relief framework still does meaningful work, rather than waiting until valuations have moved further. So might restructuring the holding company, or carving the trading premises out, or considering whether part of the business should be sold to fund growth in the part with the strongest margin.

There is one quieter consequence that deserves more attention than it has received. For most of the past five decades, the implicit deal between family manufacturers and the tax system was that you could spend your career building something, and the state would not extract a slice of it on the way to your children. That arrangement is gone. What replaces it is a system where the bigger and more successful the business, the more important it becomes to formalise plans that, in many family firms, have always been carried in the founder's head. Whether that is a good thing or not depends on your view of how UK industry should be passed on. What it is not, is something that can be left until next year.

The hardest part, for most owners, is not the arithmetic. It is the recognition that the question of who owns the business, and how it transfers, is no longer one that can be deferred. The plan on the wall, the one with the new press in bay three, sits inside a wider plan that now has to be drawn.

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This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

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