The chancellor’s October 2024 budget rewrote the rule book for inheritance tax (IHT). The follow up consultation regarding the announced changes have now closed and we await the final outcome, although little is expected to change for the original announcement. Based on the Budget announcement, the expected IHT position is summarised below:
- Until 6 April 2026 – there have been no changes to the rules. Each estate benefits from a tax-free nil rate band of £325,000.
- An additional £175,000 residence nil rate band to those passing on a qualifying residence on their death to their direct descendants. This relief is tapered £1 for every £2 that the value of the estate exceeds £2 million. So, any estate over £2.35 million will lose this relief in full.
- Agricultural property relief (APR) and business property relief (BPR) are available at 50% or 100%, depending on the nature of the asset, with no limit in the amount of assets the relief can be claimed on.
From 6 April 2026:
- A new £1 million cap per estate restricts the value of assets on which 100% APR and/or 100% BPR can be claimed.
- Any value above £1 million on APR/BPR qualifying assets will only benefit from 50% relief, which results in a marginal IHT rate of 20%. On any qualifying asset above the £1 million allowance.
- Unlikely the tax-free nil rate band, the £1 million allowance cannot be transferred between spouses, so it is beneficial to utilise it on the first death.
Any resulting IHT liability can be paid in instalments spread over 10 years. Instalments are usually liable to HMRC’s interest rates (8.57% as at April 2025); however, if the liability relates to APR or BPR qualifying assets, the instalments will be interest free.
From 6 April 2027
- Pension funds will form part of an individual’s death estate and be subject to a 40% IHT charge.
How can you mitigate the impact?
Lifetime gifting of assets
Any lifetime gift of an asset made to an individual more than seven years prior to death will fall out of your death estate for IHT purposes. Where the asset gifted qualifies for APR or BPR it is possible to holdover the capital gain, so no immediate capital gains tax (CGT) charge arises. The recipient takes on the original base cost of the asset and would pay CGT on the difference between the net sales proceeds and the original cost.
Where it is not clear who the eventual recipient of the asset will be, or the recipient is a minor, or there is a requirement to protect the asset, a gift into trust could be beneficial. There are many benefits to using a trust, but they also come with additional administrative requirements.
It is essential to take both tax and legal advice before embarking on lifetime gifting.
Making gifts out of income
If you are generating more annual income than you need to cover your outgoings, consider making regular gifts out of income to friends, or family to prevent your estate from increasing in size any further.
Will planning
Ensure you have flexible Wills which allow for the use of the 100% £1 million APR/BPR allowance to be claimed on the death of the first spouse. Wills may include a discretionary trust to allow assets to be left to the next generation, or to prevent the remaining spouses’ estate from increasing in value. A partnership agreement will take priority over a Will, so ensuring both documents complement each other is crucial.
Deathbed planning
If an individual has died within the last two years, consider making maximum use of the IHT reliefs currently available. A deed of variation can be prepared to reallocate assets amongst beneficiaries up to two years after the individual has passed away.
What should you be doing now?
Following the announced changes, it is important for all individuals to understand their IHT position and to start a succession plan, which considers the following:
- Review your IHT position, using up-to-date market values and business valuations to ascertain your potential IHT exposure.
- Consider lifetime gifting of assets and any excess income.
- Check your Will is up to date and allows flexibility on your death.
- Ensure your Will and any partnership agreement complement each other.
- Have open conversations with family members regarding your wishes on your death.
- Consider taking out life insurance cover to provide a capital sum to cover potential IHT liabilities.
The proposed IHT changes to APR and BPR are unwelcome, and the most significant tax changes effecting the farming sector for many years. Our team are here to help you navigate the changes, if you would like to discuss any of the above, please don’t hesitate to contact one of our specialist Farms and Estates team.
