A real HIT on IHT! 

Following the announcements made in the Budget on 30 October 2024, thousands of generational family businesses will be exposed to Inheritance Tax (IHT) for the first time in many years as valuable reliefs will be reduced by 50% from April 2026.

The measures announced by Rachel Reeves have sent shockwaves through the UK family business and farming communities and amongst their professional advisers, insofar as the punitive IHT announcements are concerned. Even though an attack on IHT Business Property Relief (BPR), Agricultural Property Relief (APR) and pensions had been widely speculated before the day, there is widespread concern at how the family owners of many UK businesses, who significantly support and contribute to the growth of the economy, creating jobs for many, will be able to survive in the long term, with the passing on of their generational businesses now hugely under threat.

Under current rules, family businesses and farms can be passed down to younger generations, on death without an IHT charge. However, Rachel Reeves has announced that APR and BPR will be reformed from April 2026. The 100% rate of relief for APR and BPR assets will be limited to the first £1m of property eligible for either relief, with the balance qualifying for only 50% relief.  We are told that a technical consultation will follow early next year with legislation to be included in a future Finance Bill. We must therefore await the outcome of this consultation for further details on the reforms, but now is still the time to start to consider family and succession planning where possible. 

The proposed changes are likely to see older generations who are still operating and owning their businesses, reconsidering their whole IHT and succession strategy, with a view to passing assets down the family bloodline much earlier during their lifetime, as opposed to waiting until death for their wealth to pass on. If this course of action is not considered, then alternative protective solutions, such as insuring against the increased IHT exposure, should be considered, at the very least.  A variety and potential mix of IHT planning measures to ensure that the business can continue in succession and with minimal interruption is likely to be required in due course. In addition, this move may encourage business owners to look for a potential exit during their lifetime but, in any event, IHT and estate planning is now more important than ever, due to increased exposure.

A basic starting point is to review and re-calculate your tax position and IHT exposure. Options then available to you include gifting (and this could be to ensure that as many £1m allowances as possible are made use of when considering future ownership structures) insurance and/or transfers to trusts with a view to surviving the seven-year period. We can also help you liaise with a family/trust lawyer to ensure that your wills reflect the £1m BPR/APR allowance and utilising this efficiently where the IHT spouse exemption may also apply.

Based upon the initial reaction from the farming community, entrepreneurs and the professional bodies/advisers, we would hope to see some relaxations, common sense prevailing and available reliefs applying on death, to enable some of the UK’s most valuable businesses to continue being family-run, without having to face an unwanted and, in many cases, harsh penal tax charge, at a time when cash is unlikely to be available to fund this. This could be the end of many generational businesses. Regional business owners and leaders may rightly now be wondering about the longer-term business friendliness of the Labour government.

This will hugely impact farmers and business owners, who are so imperative to the backbone of the UK economy and the jobs market.  Now is the time for such entrepreneurial clients to start to consider and review their succession and will planning, with a view to making changes.

The information that is currently apparent from the policy paper published on 30 October 2024 is as follows:

• The allowance will apply to the combined value of property in an estate qualifying for 100% BPR and APR. If the total value exceeds £1m, it will be applied rateably across the qualifying property;
• The allowance covers property passing on death plus failed PETs and chargeable lifetime transfers;
• There will also be a £1m allowance for trustees on the value of qualifying property to which 100% relief applies, in relation to 10-year charges and exit charges (and the Government intends to introduce rules to ensure the allowance is divided between trusts set up by the same settlor on or after 30 October 2024). The detailed application of the rules to trusts will be included in the technical consultation;
• The new rule will apply to lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026. Anti-forestalling measures are expected.

There was also an announcement about shares listed on the AIM stock market. Currently such assets qualify for 100% relief, but this will be reduced to only 50%. Many clients favoured this type of asset because, after a two-year ownership period, they could achieve 100% IHT relief against the value of their AIM portfolios. Clients with AIM portfolios will also need to revisit their strategy, which may no longer be appropriate.

Again, as expected and although a dramatic change, is that pensions have come under fire from an IHT perspective. The Chancellor has announced, that from 6 April 2027 when the pension scheme member dies, any unused pension funds and death benefits payable to the beneficiaries (other than to a spouse), will no longer be exempt from IHT.

In addition, legislation will be introduced in the next Finance Bill to freeze the IHT nil rate bands until 2030. The nil rate band (NRB) will remain at £325,000 and the residential nil rate band (RNRB) at £175,000. The tapering of the latter will continue to start at £2m and, considering that unused pension funds on death will be brought within the IHT net from April 2027, if they also count for the purposes of the £2m estate limit for the RNRB test, this will disallow the RNRB for many estates which currently qualify for it. This feels unnecessarily harsh, and we will need to await further details on this.

Non-doms have also faced an IHT hit, which Labour have seen through by putting an end to the ‘excluded’ property trust which has, to date, allowed non-doms to shelter from UK IHT their non-UK assets, even once they became deemed domiciled in the UK and continued living in the UK.  In addition, once an individual will have been UK resident for 10 years, they will become liable to IHT on their worldwide assets and, even if they leave the UK, will remain so for a further 10 years post-departure. As expected, and originally announced in the March Budget, the existing remittance basis regime for income and gains will be replaced with a residence-based test.

So, a huge IHT shock and increased IHT exposure for those supposedly with the broadest shoulders! We have to question whether this strategy will enable the UK to grow in the longer term. The NFU is making submissions to the Chancellor, and family business advocates have criticised the move as poorly conceived, with Neil Davy, CEO of Family Business UK, calling it ‘a betrayal of Britain’s hard-working family business owners’. Clients should seek advice about future IHT and succession planning without delay.

We do plan to hold an event in due course once we have more detail on these significant changes. Please get in touch with your usual HURST contact for more information or our Private Client Tax Partner, Karen Chadwick who will be delighted to assist you.