On 23rd December the Government surprisingly announced that the new allowance for 100% agricultural property relief (APR) and business property relief (BPR) for inheritance tax (IHT) will be increased from £1m to £2.5m.
The timing is odd – coming so soon after the Budget in November where it had already been announced that the capped allowance would be transferable between spouses.
The £1m restriction had been announced in the Budget 2024. It marked a dramatic change in the taxation of businesses and triggered the need for a wholesale re-think of succession planning for family businesses.
The impact of the Labour budget on small businesses | Weightmans
For spouses and civil partners, the watering down of the proposed restrictions on relief will mean that up to £5 million in assets qualifying for agricultural or business assets can be shielded from IHT entirely. Above that, and subject to the personal IHT allowances available to all (which could be worth up to an additional £500,000 per person), the effective rate of tax will be 20%.
Whilst the news is welcome, the fundamental change to make IHT payable on interests in trading businesses remains, and many owners will still be caught be the new rules from April 2026. For businesses operating from premises within the owner’s pension pot, the issue is exacerbated as pension death benefits are also being made subject to IHT from April 2027.
IHT planning for business owners has therefore become an issue and ways to mitigate it needs to be on the agenda on a recurring basis.
Advice should be taken to consider what options are available for planning during lifetime and on death. This could include:-
- Transferring shares to family members as soon as possible needs to be considered to fragment ownership. This may need to be accompanied by corresponding protective measures which could involve recipients putting pre or post-nuptial agreements in place, amending shareholder agreements and/or using trusts.
- Transferring BPR qualifying assets into trust to “bank” the relief. This will be particularly relevant for family businesses looking to hand over to the next generation at some date in the future.
- Paying for life insurance to cover the risk.
- Reviewing exiting trusts to ensure that the effect of the new tax charge is anticipated and planned for.
- Reviewing wills to make sure that these are appropriately structured to maximise use of the amended allowances, particularly in respect of married couples.
If you are a business owner and are worried about the impact of IHT on your estate please contact our Private Wealth and International Private Wealth teams.
