By 2028/29 the Office for Budget Responsibility expects some 43,600 estates, or 6.27% of deaths, to be liable to Inheritance Tax. HMRC is expecting to increase its Inheritance Tax take by £500m in 2023/24, and these statistics are before a recalculation following the October Budget.
For those clients who operate a trading business (and farmers), they have until recently not had to worry about Inheritance Tax in respect of their business, or farm. This is because most trading businesses, and farmers would qualify for Business Property Relief, or Agricultural Property Relief, which exempted the asset from Inheritance Tax on death; these reliefs prevented the sale or break up of the business to settle Inheritance Tax liabilities.
The Chancellor in the October 2024 Budget, made significant changes to Business Property Relief, and Agricultural Property Relief. For deaths after April 2026, there will be 100% relief for qualifying businesses and farms up to £1m per individual, and above this the value of the asset will be taxed at 20% (50% of the normal rate of inheritance tax). The £1m allowance will cover:
- Transfer of a business or a trading company shares in the estate on death;
- Lifetime transfers to individuals in the seven years before death;
- Chargeable Lifetime transfers where there is an immediate lifetime charge, for example, when the asset is transferred to a trust.
Any unused allowance, it appears will not be transferable to a spouse.
Full details are yet to be released, however as an example if an individual owns 100% of the shares in a trading company valued at date of death at £4m, £1m would qualify for Business Property Relief, the balancing £3m would be taxed at 20%, giving a tax liability of £600,000, compared to today where no tax liability would arise.
With the changes business owners and farmers will need to consider Succession Planning, which although Inheritance Tax is a personal liability, it is likely that the business in some way will fund the liability.
What can be done to minimise tax and protect the business?
- Consideration given to the early transfer of the business, or in part, to younger generations earlier than would be normally planned, as it is still possible to transfer qualifying shares and assets without triggering a tax liability relying on holdover relief (sometimes called gift relief), in addition to relying on the seven-year survival rule;
- Holdover Relief defers the Capital Gains Tax by a joint election being filed with HMRC, transferring the chargeable gain from the donor to the done (the individual receiving the asset). In surviving seven years from the date of the gift the asset then becomes outside the death estate of the donor for Inheritance Tax purposes. The gift has to be outright, so serious consideration has to be given to this action, and any protection measures;
- Depressing business valuations by transfer restrictions in company articles and partnership agreements can be used to depress the value of the business, without impacting its operation. Currently with the 100% Inheritance Relief, and the market value uplift for Capital Gains Tax purposes results in valuing a business as high as possible, the proposed changes, result in an incentive to achieve the lowest value possible;
- Review shareholder/partnership agreements to ensure that there are cross option clauses rather than ‘buy and sell’ clauses that mean should a shareholder/partner die the remaining shareholders/partners have an option to buyback the shares/share;
- Putting in place or reviewing existing insurance policies, to generate funds for the business on a death;
- Effective wills with consideration of the use of Trusts. As the allowance is not transferable between spouses, consideration should be given to passing the asset to the next generation, as opposed to a spouse.
In addition to the changes in April 2026, we await the results of the consultation that closed a couple of weeks ago regarding pensions becoming subject to Inheritance Tax in April 2027.
As Inheritance Tax becomes more complicated and more estates are caught, the tax take increases alongside the level of investigations and enquiries. HMRC opened over 3,100 Inheritance Tax investigations with £251m recovered over the period.
Harbour Key will provide updates as soon as more is announced on the Budget's Inheritance Tax changes. In the meantime, should you wish to discuss the changes, please do not hesitate to contact our offices.
