Reacting to: Healey plots Budget raid on family businesses (City A.M.) →
Chancellor John Healey is reportedly drawing up plans to close a route that lets a retiring business owner hand their company to their children taxed as a capital gain rather than as income, according to a Telegraph report covered by City A.M. this week. It isn't the headline-grabbing bank levy or gambling machine tax everyone is talking about ahead of the Budget on 28 October — it's a much quieter change aimed at a specific group: parents retiring out of a family business while a son or daughter takes it on.
This is the one worth five minutes if that describes your situation, because the gap between the two tax treatments is large and the transaction it applies to is, for most family firms, the single biggest tax event the owners will ever face. A rate change everyone already pays is one thing. A change to which tax applies at all is another.
How family businesses pass down tax-efficiently today
The mechanism City A.M. describes is specific. Instead of selling the business to the next generation outright and taking the proceeds as a lump sum of income, many retiring owners convert their shares into redeemable shares, which the company then buys back using its own retained profits. Under HMRC's purchase-of-own-shares rules, set out in its Company Taxation Manual at CTM17500, a buy-back structured and timed correctly is treated as a capital disposal rather than a distribution of income. That means the proceeds are taxed under Capital Gains Tax rules, at the main rate of 24% for a higher-rate taxpayer in 2026-27, rather than as income, where the additional rate reaches 45% above £125,140.
That 21-point gap is the whole story. Healey is reportedly considering shutting off this specific use of the capital route for intergenerational handovers, which City A.M. reports could "potentially almost double" the tax bill on exactly the same transaction. The report is careful to note this is being discussed internally as a tightening of anti-avoidance rules rather than a general tax rise, and that a straightforward sale to an unconnected buyer on the open market already attracts Capital Gains Tax regardless — it's specifically the family-handover use of the redeemable shares route that's under review.
Worked numbers: what closing the route could cost
Take an illustrative example. Say a couple in their early sixties run a trade or retail business and are retiring, handing the company to their adult daughter, who already works in it. The business carries a taxable gain of £400,000 on the shares being bought back — a realistic mid-size figure for a business that's traded for twenty or thirty years.
Under today's rules, after the £3,000 annual exempt amount, that gain is taxed at the main Capital Gains Tax rate of 24%: a bill of £95,280. If the same transaction were instead taxed as income, and the gain is large enough and the owners' other income high enough in the year of retirement to fall mostly within the 45% additional-rate band, the bill becomes £180,000 — £84,720 more, on exactly the same handover, with nothing else about the business changed. Even at the lower 40% higher rate, assuming some of the gain lands below £125,140, the bill is £160,000, still £64,720 more than today. Neither figure includes any employer or employee National Insurance that might apply depending on how the transaction is structured, which the report does not specify.
What it means for you, by situation
If you're actively planning to hand your business to a child in the next year or two, this is worth modelling properly before 28 October, not because the Budget should drive the timing of a family decision, but because knowing both numbers — the cost today and the cost if the route closes — changes how useful advance planning is. Our tax planning team can run both scenarios against your actual figures rather than an illustrative £400,000.
If retirement and handover are years away, nothing changes for you today, but it's worth filing this alongside the family business inheritance tax changes from an earlier Budget — reportedly worth about £300m a year to the Treasury — as a sign that family business succession specifically, rather than business taxation generally, is where the Chancellor keeps returning for revenue.
If you're selling to a genuine third party rather than passing the business to family, City A.M.'s report doesn't suggest this affects you — a sale on the open market already attracts Capital Gains Tax under the existing rules, and the reported change is aimed at the family-handover use of the redeemable shares route specifically. Our guide to exit planning for business owners covers the routes out in more detail, including what the current Business Asset Disposal Relief rate costs on a trade sale and, for Northern Ireland businesses, what the reduced relief on an Employee Ownership Trust sale costs — the same UK-wide Capital Gains Tax rates apply to an EOT sale wherever the business is based.
What's still uncertain, and when we'll know
Everything here is reported Budget planning, not announced policy. The Budget date itself — 28 October 2026 — is confirmed, and we set out what's already law for the current tax year in our guide to the twelve weeks before the Budget; nothing about this specific change is in that confirmed list, because nothing has been confirmed yet. The Institute for Fiscal Studies has separately warned the Chancellor faces a roughly £35bn gap in the government's spending plans, which is the pressure reportedly behind this and several other measures being discussed for the Budget. Healey has reportedly ruled out raising the general Capital Gains Tax rate to match income tax rates across the board, so if this goes ahead it's expected to be a targeted change to the redeemable shares route specifically, not a wider Capital Gains Tax rise. None of that is guaranteed until 28 October.
Two things to do this week
First, if a family handover is genuinely on the table in the next year or two, get the numbers modelled now under both today's rules and a worst-case income-tax scenario, so a Budget Day announcement is something you react to with a plan already in hand rather than something that catches you mid-transaction. Second, read HMRC's own rules on how a share buy-back qualifies for capital treatment today, at gov.uk's Company Taxation Manual (CTM17500) — the qualifying conditions are specific, and a buy-back that doesn't meet them is already taxed as income under existing law, Budget or no Budget.
Modelling a family business handover properly, both what it costs today and what it could cost if the rules change, is exactly the kind of planning our tax planning service is built for. If you want your own figures run rather than an illustrative £400,000, talk to us before 28 October.