We’ve seen major changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) announced in the October 2024 Budget. This was alongside another significant change in the IHT treatment of pensions, with the expectation that the full value of the pension will be subject to IHT from April 2027.
Historically, business owners and farmers have not generally had to contend with IHT on their business interests and farmland. However, under the rules proposed from April 2026, the first £1m of APR/BPR assets will qualify for 100% relief but any excess will receive only 50% relief. Effectively, this results in a 20% IHT charge on value above £1m.
Unlike the ‘NIL rate band’ (of £325,000), the £1m limit on 100% relief is not transferrable between a married couple. Unless the final rules are changed, this means more consideration needs to be given to the Will in what happens on the death of the first spouse.
Consider a surviving spouse who passes away post- April 2026 owning a £1m home, £3m business and £1m pension. Previously, the estate’s IHT liability would have been £140,000 (the residence NIL rate band would have been fully tapered); a relatively affordable amount for the estate. Post-April 2026, that IHT liability is now £940,000. Although the majority of the liability may be payable over 10 years, it seems very likely the business will have to be sold to fund the IHT.
What might be done?
- First, gifts made during the lifetime are still possible so that with good planning and time on your side, assets can be passed on to the next generation. Depending on the nature of the asset, capital gains tax and other tax liabilities will need to be reviewed. Taper relief continues to be available from year three following the gift with the gift removed from the estate entirely from year seven.
- Subject to the final form of the rules, Wills should be looked at to review whether the £1m APR/BPR allow- ance can be utilised on the first death. This is not the way Wills would have been drafted previously so they will need to be revisited.
- More complex planning might involve seeking to remove future growth in value from the estate of the older generation. We would typically see this in the context of ‘investment’ assets but the change in rules means this is more attractive for operating businesses where the older generation are not ready to gift shares but would like to hedge their future IHT position. Valuations here are crucial to ensure there is a robust position to defend if HMRC enquire.
More generally, families need to understand the assets (and any liabilities) they have and this is particularly relevant for farming families. Farms which have been in the family for generations often have some complexity and uncertainty on the ownership of different elements. Whilst we wait for greater clarity when the consultation closes during 2025, families can ensure that they understand the ownership and this is reflected in any formal documentation – whether accounting records or land registry documents.
Some individuals are also now giving greater thought as to whether they continue to reside in the UK. Individuals and families who are mobile, despite their business interests, may opt for a new country with a friendlier IHT regime. The scrapping of the long established ‘domicile’ rules in favour of a long-term ‘residence’ test means that there is greater certainty on the IHT position but likely with a longer period of time before an estate escapes UK IHT on non-UK assets.
Finally, where it is not feasible to gift shares or otherwise plan for IHT on the family business, insurance may be the only solution. Premiums for a married couple in good health are likely to appear good value in the context of a worst-case scenario. Sadly, alongside the emotional trauma of losing parents, a lack of insurance could mean that the next generation are left facing some drastic decisions on the future of a long-standing business.
As we wait for the consultation on these new rules to be published, there are a number of actions families can take. Whilst some immediate changes may be premature, IHT planning is always a journey and the thinking will need to begin.
To find out more contact Nathan Sutcliffe at MHA via the website.
Tax Partner
MHA
