Significant changes were announced at the 2024 Autumn Budget to the inheritance tax (IHT) regime which will have many business owners and farmers reconsidering their plans for succession.
Previously, 100% IHT relief was available for all qualifying business and agricultural assets. From April 2026, however, only the first £1 million of combined qualifying assets will be exempt from inheritance tax. For assets above this threshold, 50% IHT relief will be available, resulting in an effective tax rate of 20%.
The first step will be to establish whether, as things stand, an IHT liability would arise on your estate. It could be that full relief would be available for an estate up to £2 million when also taking into account the nil-rate band of £325,000 and the residence nil-rate band of £175,000 (which would equate to a further £1 million for a couple). If, however, your estate is likely to be of a higher value than this, other options could be explored to try and minimise any potential tax liability on death.
Lifetime gifts
One of the simplest ways to plan for succession and to mitigate an IHT liability would be to consider gifting assets to the next generation now. This would have the effect of reducing the value of the estate, falling out of a charge to IHT altogether if the individual survives for seven years following the gift. Taper relief would also be available for gifts made more than three years prior to death, reducing the IHT liability below the 40% rate which could be payable if still held at death.
The gift may not be subject to capital gains tax with the possibility of electing to ‘hold over’ any gain such that the person receiving the gift would inherit the original base cost of the asset. This could, however, mean that more capital gains tax may be ultimately due on the sale of the asset by the beneficiary, if and when sold.
Trusts and family partnerships
Trusts and family partnerships continue to be effective tools for managing wealth and succession. These structures can provide flexibility and control over how assets are distributed, while also offering potential tax benefits.
For trusts created prior to 30 October 2024, we understand that they will receive a £1 million limit per trust, however, rules will be introduced to divide the £1 million limit between trusts created after Budget date.
Do nothing
Draft legislation for the new rules has not been included in the 2024/25 Finance Bill, so we will need to wait a little longer until we have full sight of how they will operate. This includes clarification on the £1 million limit in relation to trusts created post Budget date and how the 10-year charge will be calculated post April 2026.
As farmers and other business owners continue to lobby against the proposals, and with almost 18 months until the rules are due to come in, the best advice for now could be to wait for the detailed legislation to be published and/or sit tight in the hope that the government could still change their mind.
Next steps
These latest changes are likely to get people thinking about planning for the future and we would recommend that, although it is not the cheeriest of topics, it is not something that is put off. At a minimum a review of your Will and any updates required as a result of the new rules would be advisable, as well as considering any gifts that could be made now.
The most appropriate approach for succession planning will be dependent upon the circumstances of each individual and we would therefore recommend that tailored advice is sought from a professional upfront.
If you would like to know more about the topics covered in this article, speak to our tax expert below.
