Inheritance Tax Reforms

Inheritance Tax (IHT) Changes post Budget October 2024 – Agricultural Property Relief and Business Relief after April 2026 Pensions liable to IHT after April 2027

Note – this note only includes changes made up to August 2025

Agricultural and Business Relief
Major changes to assets qualifying for Agricultural Property Relief and Business Relief (“Qualifying Assets”) due from 6th April 2026;

Current position
• Agricultural Property broadly consists of farmland, farm buildings and farmhouses of an appropriate character for the land
• Business Property consists of shares, an interest in a business, an interest in a partnership or assets used in a business. The business must be a trading business not an investment business.
• Business Property also includes interest in shares in qualifying companies listed on the Alternative Investment Market (AIM).
• Currently most qualifying Agricultural or Business Property receives up to 100% relief from IHT. Relief operates by reducing the taxable value of the asset to nil
• For certain assets the relief is restricted to 50%

Changes
Individuals
• From 6 April 2026 the amount of 100% relief available will be restricted to £1million per person; anything over and above the £1million will only attract 50% relief.
• The £1million relief will not be transferable between spouses – transferring Qualifying Assets to the surviving spouse on the first death will lose the exemption. Thus the survivor will only have £1million exemption on his or her death.
• For lifetime gifts, the £1million relief will refresh every 7 years. Thus, it will be possible to gift £1million of qualifying assets every 7 years. However, if the donor dies within 7 years, the Qualifying Assets will still need to qualify at the date of death for the relief to apply.
• HMRC intends to index the £1million allowance in line with the increase in CPI after 5th April 2030. NOTE – this type of increase was also proposed for the residence nil rate band when it was introduced in 2017 and for the inheritance tax nil rate band (frozen since 2009). Both inflationary increases have been frozen until 2028. On past performance, it would be unwise to rely on any increases.
• For individuals with more than one qualifying asset, the relief will be allocated pro rata amongst them.
• Relief for shares in qualifying AIM stocks will be restricted to 50%;

Trusts
• The position for trusts is more complex. This only applies to relevant property trusts
• Trusts settled before 30 October 2024 with Qualifying Assets: -
◦ Qualifying Assets held in relevant property trusts before 30 October 2024 will retain business relief for the period to 5th April 2026.
◦ For the period after 6 April 2026 until the 10 year anniversary Trusts with Qualifying Assets will receive £1million relief per trust.
◦ This relief will apply to exits for the ensuing 10 years
◦ The £1million relief will renew at each 10 year anniversary
• Trusts settled after 30 October 2024 with Qualifying Assets: -
◦ There will be a single £1million allowance between them allocated in chronological order.
◦ a single settlement of £1million of Qualifying Assets will use all of the £1million trust allowance.
◦ Qualifying Assets in subsequent settlements will only get relief at 50%.

• Valuation of farms and business will now become critical in assessing the potential liabilities
• Farm and business owners may face high tax liabilities.

Options
• Gifting/Early succession planning
◦ Structuring of Businesses / Farms now more important than ever
◦ Early Succession Planning - spread ownership amongst wider family - more £1m allowances;
◦ Rules surrounding trusts are extremely complex – need specialist advice;
◦ Opportunities still available will cease from April (i.e. you can get >£1m in just now);
◦ 7 year rule
▪ Gifts made now will still be caught if death is after April but within 7 years
◦ Operational difficulties
▪ Incorporation – easier to separate ownership and control but CGT/LBTT considerations
▪ Shareholder agreements and changes to articles to limit spread of ownership
▪ Pre/post-nup considerations for younger family members/untested relationships
• Funding
◦ 10 year interest free instalments available
◦ Insurance based solutions
◦ Building up cash reserves to meet the tax
▪ If built up inside the business it jeopardises relief
▪ Extracting funds to pay the tax is subject to income tax.
• Selling up
◦ Converting to cash foregoes all relief but cash is easily gifted
◦ Investing in AIM shares retains 50% relief
◦ EOTs for relief from both IHT and CGT
◦ Cash can be used to fund other vehicles which allow transfer of value without full control

Pensions
• Pensions will also be brought within IHT from 6th April 2027
◦ Have previously been a useful shelter but no IHT benefit going forward
◦ May still have income tax benefits
• There will be no APR/BPR available on Qualifying Assets held within pensions. This will have a significant impact for owners of businesses who have put the business premises into their pension schemes.
• Not a useful source of funds to meet IHT on estate assets – Pension Scheme Administrators (PSAs) will only be authorised to release tax on the pension. “Unauthorised withdrawals” subject to income tax.

Overall Conclusions
• Early holistic estate planning is now essential
• All professional advisors need to work together – Solicitors, IFAs and Accountants
• Due to the complexity of all the new regimes, generic advice is likely not to be sufficient – personalised advice will be important
• IHT is not the only tax –
◦ Capital Gains Tax (CGT) and Land & Buildings Transaction Tax (LBTT) on gifts/restructures
◦ Income tax implications for pensions
• Usual advice is not to make decisions wholly driven by tax but the values involved can make it difficult not to.