FAQs Business and Agricultural Property Relief Changes
On 30 October, we saw perhaps the most hyped budget of a decade (or so) in terms of the significance of the changes made, particularly in the realm of Inheritance Tax (IHT).
Pensions may have been hit, with pension pots becoming liable to IHT from April 2027. For some years, retaining a pension pot until death was an efficient way to pass down wealth to the next generation. This strategy will need to be re-visited by many, taking advice from both tax professionals and pension advisers to plan for the upcoming changes and to ensure the efficient succession of assets. It will be key to ensure that pension funds may continue to be freely accessed by surviving family members, now that pensions will need to pass through probate.
The Chancellor announced that the tax free thresholds for IHT will remain frozen until 2030, potentially bringing more taxpayers into the scope of paying IHT if asset values continue to grow over this period.
With many of our clients being business owners, the changes to business and agricultural property relief are likely to have a significant impact. So, what do these changes mean for you?
Business Relief and Agricultural Property Relief: What are the changes?
To date, qualifying business and agricultural assets have passed to the next generation (either directly or through a trust) free of any IHT, providing relevant conditions were met. There has been no limit to the amount of relief available, provided all the assets qualified for the relief. Consequently, a qualifying business say worth £10 million, could pass down the generations with no IHT charge. The tax saving amounted to a maximum of 40%.
The Chancellor has announced that from 6 April 2026, the relief will be capped so that the 100% relief from IHT will only be given on the first £1million of qualifying assets. The value of qualifying assets thereafter will attract 50% relief, meaning the transfer of business assets to the next generation will trigger a 20% IHT charge. Ultimately, this cost will need to be funded by the business so it is essential to plan for how this liability will be paid to avoid a detrimental impact on the business.
The £1million allowance is per individual and is a combined allowance which applies for business property and agricultural property. Therefore, where an individual holds agricultural assets and business assets, the relief would apply across both asset values. It is often the case that for a farming business, both reliefs would apply and therefore the loss of relief is particularly significant for faming businesses and landed estates.
Furthermore, shares designated as “not listed” on markets of recognised stock exchanges qualifying unlisted stock markets, such as AIM shares, will now only qualify for 50% relief from the main rate of IHT of 40%. Previously these assets qualified for 100% relief. The £1million allowance is not used against these assets – therefore in many ways that is a benefit.
Are there tax planning opportunities to consider at this stage to mitigate the tax exposure?
Yes, with a period of around 16 months until the changes come in (in full) there are likely some planning opportunities to consider at this stage which may help shelter assets from IHT.
The sooner you look at succession planning and review your IHT position, the more likely there will be an opportunity to mitigate the eventual tax exposure.
The possibility of settling qualifying assets into trust or passing assets to the next generation in lifetime, before the changes come into effect, is likely to be attractive.
Efficient planning will remain key under the new rules, to maximise the available reliefs. It is also important to ensure the business relief (or agricultural relief) position is reviewed frequently to ensure the assets held continue to meet the relevant conditions to qualify for relief.
Planning for these changes is of great importance because individuals and business owners will need to factor into their succession planning, the settlement of increased tax liabilities on previously relievable business assets.
To that end, the taking out of life insurance may be considered as a practical way to cover the payment of IHT. Our colleagues at Menzies Wealth Management are happy to advise in this respect.
What can be done to avoid IHT on death for business and farming assets?
- Consider making gifts of qualifying assets during lifetime. If you make an outright gift and survive 7 years, the value of the assets would pass free of IHT.
- Consider the ownership of shares / farms / businesses so that each spouse uses their £1m allowance.
- You may also wish to consider use of the £1m allowance amongst wider family members, where appropriate.
- Effective Will planning for the succession of the business;
- Make use of trusts to benefit from the £1m trust allowance (per donor);
- Review the holding of business or agricultural property to ensure structure and activities meet qualifying conditions for relief; Monitor regularly.
- Particularly in high growth businesses, consider structure and succession. For example, use of growth shares may ensure future growth is outside the scope of your Estate for IHT purposes.
Ultimately, the best route for each individual, and each business, should be bespoke, as can be seen from the above examples.
Can Trusts be used to
plan for this change?
Use of trusts is likely to be an attractive option, trusts will also have a £1million allowance per settlor in their lifetime. As for individuals, the 50% relief will apply thereafter.
We don’t yet have the full answers as more detail is expected in a consultation for trusts in early 2025. The strategy is likely to differ depending on the taxpayer’s circumstances and overall objectives.
We will also need to review the position for existing trusts holding qualifying assets and if anything can be done to mitigate the impact of the changes on the existing trusts. If you have a trust containing qualifying assets in excess, or nearing the £1million threshold, please get in touch to speak to one of our advisers.
Does your Succession planning strategy need a re-think in light of the changes?
In short, yes, we would recommend that if you are affected by the rule changes noted above, that you re-consider your strategy to ensure that your business is in a healthy financial position for continued trading down the generations.
Considering business strategy, succession planning and tax planning hand-in-hand is key. Our excellent tax advisers can assist in conducting an overall IHT review and work with you to produce an overall succession plan which works for you and ultimately achieves your wishes.
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