For business owners and farms
The UK government has announced significant reforms to Inheritance Tax (IHT) reliefs for business and agricultural properties, set to take effect from April 6, 2026.
The headline proposals have been well-rehearsed but the realisation of some of the implications is coming out more gradually.
Key Changes:
- Relief Cap: Currently, Business Property Relief (BPR) and Agricultural Property Relief (APR) can provide up to 100% relief from IHT on qualifying assets. Under the new rules, this 100% relief will be capped at the first £1 million of combined qualifying agricultural and business property. For asset values exceeding this threshold, a reduced relief rate of 50% will apply.
- Scope of Relief: The above relief will continue for unlisted shares in private companies. However, shares that are traded on certain public exchanges (such as the Alternative Investment Market) will see their relief reduced from 100% to 50%.
Implications for Business and Farm Owners:
These reforms are expected to have a substantial impact on family-run businesses and farms. The reduced relief may lead to higher IHT liabilities, potentially affecting the financial viability and continuity of these enterprises. Concerns have been raised that the changes could discourage investment and hinder the long-term sustainability of family businesses.
Valuation: Where 100% relief has been anticipated in the past, the value of the business or the farm may not have been a concern from an IHT perspective. Looking forward, it will be more important to understand the values in order to appreciate the potential tax liability and assess options for mitigating or funding that cost.
Non-Transferability Between Spouses: The proposed reforms raise questions concerning the owners’ approach to will planning between spouses.
- Importantly, the £1 million 100% relief allowance is a lifetime cap and is not transferable between spouses. This means that if one spouse does not fully utilise their £1 million allowance, the unused portion cannot be transferred to the surviving spouse.
Implications for Will Planning Between Spouses:
- Potential Wastage of Relief: Traditionally, spouses might leave business assets to each other, relying on the spousal exemption to defer IHT until the second death. However, under the new rules, this approach could result in the wastage of the first spouse’s £1 million relief allowance.
- Reconsidering Asset Distribution: Therefore, to maximise the available reliefs, spouses may need to reconsider their will planning strategies. This could involve:
- Direct Bequests to Descendants: Leaving business assets directly to children or other beneficiaries upon the first death to fully utilise each deceased spouse’s £1 million 100% relief allowance.
- Use of Trusts: Establishing trusts to hold business assets can provide protection and control over the assets, flexibility in timing and extent of asset distribution and potential tax efficiencies. However, the new rules may affect how trusts are treated, so professional advice is essential.
- Reviewing Ownership Structures: Spouses should assess how business assets are owned (e.g., jointly or individually) to ensure that each can fully utilise their respective maximum relief allowances.
Recommendations:
- Consult Advisors: Given the complexity and potential financial impact of these reforms, it’s crucial for business owners to seek advice from legal, tax and finance professionals to develop tailored estate planning strategies.
- Regularly Update Wills: Ensure that wills reflect the current legislative environment and personal circumstances to optimise tax reliefs and achieve intended asset distribution.
- Stay Informed: Keep abreast of any further legislative changes or clarifications to adapt estate planning strategies accordingly.
These reforms represent a significant shift in the taxation landscape for business and agricultural property owners. By proactively addressing these considerations, business owners can better navigate the upcoming IHT reforms and safeguard their earned wealth for future generations.
If you have a pension fund…
The Autumn Budget 2024 also introduced further significant changes to Inheritance Tax (IHT) rules, particularly affecting pensions. Starting from April 2027, unused pension funds and death benefits will be included in the value of an individual’s estate for IHT purposes. This marks a departure from the current system, where such funds are typically outside the IHT net.
To prepare for these changes, consider the following steps:
- Review Your Pension Strategy: Assess your current pension arrangements to understand how the new rules may impact your estate’s IHT liability. This may involve re-evaluating the timing and amount of pension withdrawals.
- Explore Life Assurance Policies: Many financial advisers are recommending life assurance policies placed in trust as a means to mitigate IHT. These policies may provide a guaranteed payout to beneficiaries, helping to cover the IHT bill and addressing potential cash flow issues, but this comes at the cost of the premiums.
- Consider Gifting Strategies: Making gifts to your family during your lifetime can reduce the value of your estate subject to IHT. However, it’s essential to be aware of other factors, such as:
- the seven-year rule, which states that gifts to individuals may be subject to IHT if you pass away within seven years of making them;
- gifts of certain assets may trigger chargeable capital gains, or other taxes such as income tax, VAT or stamp duties, depending on the nature of the assets given away; and remember that:
- if you give away an asset but continue to derive benefit from it, then it will be deemed to remain in your estate for IHT purposes, even though other taxes may have been borne on the gift transaction.
- Establish Trusts: Setting up trusts can help manage and control assets while shielding them from IHT. Trusts offer benefits like maintaining family wealth within a smaller group and providing more control over asset distribution. However, they come with complexities and potential tax and other costs, so professional advice is crucial to help you to understand whether this is an appropriate solution for you.
- Stay Informed and Seek Professional Advice: Tax laws are complex and subject to change. Regular monitoring can help ensure that your estate planning strategies remain effective and compliant with the latest regulations.
By proactively addressing these considerations, you may better position your estate and your family to manage the forthcoming IHT changes.
Our team at KW is experienced in helping families to assess the potential impact of these tax changes and will be pleased to explore options with you to mitigate forthcoming increased IHT liabilities.
If you have any queries regarding this article and exploring your planning opportunities, please contact Anne Smith on 01633 653150 or Anne.smith@kilsbywilliams.com. Alternatively, please contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
