We were expecting changes to Inheritance Tax (IHT) but the impact of what has been proposed could be catastrophic for smaller businesses seeking funding to help them grow and the succession plans of established family businesses, especially farmers.
Last week, the Chancellor announced the following measures.
- From 6 April 2026, assets qualifying for Business Property Relief (BPR) and Agricultural Property Relief (APR) which are included in your Estate, on death, will only attract 100% IHT relief on a combined value of £1m. Value in excess of this will be liable to IHT at 20%. The new cap will also apply to gifts made on or after 30 October 2024 where death occurs after 6 April 2026.
The £1m BPR/APR cap will also apply to Trusts holding qualifying assets.
Individuals who have invested in AIM shares will, from 6 April 2026, be liable to IHT at 20% on the value of their investments. Octopus type BPR qualifying investments should only be liable to 20% IHT to the extent their value exceeds the £1m cap.
Whilst IHT on some assets can be paid in instalments as part of the administration of an Estate, the proposed changes to IHT reliefs may result in an unviable business for the next generation if assets need to be sold, finance arranged, or dividends drawn from companies at 39.35% to settle the IHT.
Any unused £1m BPR/APR allowance will not be transferrable between spouses. - The value of your unspent pensions and death in service benefits will, from April 2027, no longer be exempt from IHT. It is likely that the pension fund itself will pay the IHT. Where an individual dies after age 75, the current rules will continue, meaning the remainder is taxable in the hands of your beneficiaries at their marginal rate of Income Tax.
- Woefully lagging behind inflation already, the IHT nil rate band (NRB) and the Residence Nil Rate Band (RNRB) will be fixed at £325k and £175k respectively for a further two years to 5 April 2020. Increased values of property and investments since 2009 – when the IHT nil rate band was first frozen – will result in significantly more families being liable to IHT.
Fortunately, the above proposals still need to pass through parliament and receive Royal Assent before they become law. Knowing that the implementation of proposed changes to pension funds (and the restriction of APR and BPR for Trusts especially where more than one Trust is set up by the same person from now onwards) will be complicated, what has been proposed will be consulted on and included in a future finance bill.
If the tax change to IHT reliefs go ahead, it will be a real blow to local businesses and farming families. After decades of tightening margins, the impact of COVID, Brexit and record inflation, many businesses will already be at breaking point without having to absorb the National Insurance increase and the over inflationary rise to the national minimum wage.
The £1m cap on IHT reliefs will certainly not preserve most family farms and local businesses for the next generation (although, from April 2025, it was confirmed that APR will be extended to include land and business managed under an environmental agreement, announced by the previous government).
If you would like to discuss how these changes may impact you then do get in touch.
