Overview
As expected, the Chancellor, Rachel Reeves, has announced significant changes to the UK Inheritance Tax regime. Her announcement affects UK resident and domiciled individuals and trusts as well as non-domiciled individuals and offshore trusts with UK assets. Business Property Relief (BPR) and Agricultural Property Relief (APR) claims will be capped at £1m per taxpayer with tax charged at 20 per cent on the value in excess of the cap. Non-listed investments (such as AIM shares) will also only be eligible for 50 per cent relief, so are to be taxed at 20 per cent with no access to the capped amount as a deduction.
The headline rate of Inheritance Tax (IHT) remains at 40 per cent. The current nil rate band for IHT, which applies to all estates frozen at £325,000, and the residence nil rate band frozen at an additional £175,000 for estates under £2m until April 2030, an extension of two years on the previously announced freeze to April 2028.
The government will bring unused pension funds and death benefits payable from a pension into the scope of IHT from 6 April 2027. Pension scheme administrators will be responsible for reporting and paying any IHT due on unused pension funds and death benefits. The government has published a consultation on the proposal and will publish a response document and carry out a technical consultation on draft legislation for these changes in 2025.
These changes will affect UK IHT payers and there is much for non-domiciled people and offshore trusts with UK assets to take in too – see our briefing.
Changes to BPR and APR
From 6 April 2026 it is anticipated that 20 per cent IHT will be charged on transfers of qualifying Business Property and Agricultural Property worth more than £1m. This is a combined cap for both reliefs. Broadly, the new tax charge will apply in three scenarios:
- On the death of an owner of such property.
- On the death of a donor of such property within seven years of an outright gift (under the well-established potentially exempt transfer (PET) regime) – this charge is levied on the recipient of the gifted property unless the donor’s Will specifies otherwise.
- On the gift into trust of such property during the lifetime of the donor/settlor.
While not yet confirmed, we assume the 20 per cent rate will also be used to calculate IHT on existing relevant property trusts (that is all discretionary trusts and most other trusts set up since 21 March 2006) at the usual fractional rate (so now up to 3 per cent for this property) on the occasion of each ten-year anniversary and at a proportion of that rate on capital distributions from such trusts.
We anticipate that this new tax charge will particularly affect owners of UK trading businesses and owners of UK agricultural land, particularly those in long-term ownership by families prioritising succession over many generations. Capping IHT relief will create financial difficulties for these owners, both in funding the tax and in planning for the future of their often long-held enterprises. The Budget has also increased day to day business operating costs by raising Employer’s National Insurance contributions and the minimum wage to add to the pressures created by recent inflation and cost increases generally. Unanticipated IHT charges may lead to a fire sale of assets to pay the tax, or expensive financing arrangements which will depress the value of otherwise healthy and well-run businesses.
Valuations
One aspect which will be of particular interest to business and land-owning families will be the valuation of this property. Business Property attracting relief is taxed at open market value while Agricultural Property is taxed on its agricultural value, often less than its full open market value. So, owners of agricultural land and property are already at a disadvantage because APR is rarely a complete relief. Following the Balfour case, it has been common for owners (generally trading as farms or leisure venues) to combine claims for APR and BPR to capture the full value of their businesses, but that may no longer be possible in future.
Many owners have invested vast sums to bring their businesses into modernity and profitability and this new tax charge will have a profound effect on their relative confidence that the rural economy can survive and thrive sustainably over generations, providing stability and jobs to their communities.
Funding the tax
Of particular interest to business and landowners who are incorporated as companies will be how the family funds IHT on their Business Property or Agricultural Property. Often such owners are not “cash rich” and will need to call on the company in question to pay them a dividend to pay the tax. This will result in a double tax bill in effect given the higher dividend rates of tax are 39.35 per cent and the new BPR charge will be 20 per cent. This leads to an effective rate of tax far higher than shown in the Budget headlines. Will the Government allow the businesses themselves to meet the tax bill as an expense? One to think about.
Trusts holding Business Property and Agricultural Property
There will be a technical consultation on the changes as they relate to trusts, opening in early 2025. However, anti-avoidance rules will apply to trusts settled on or after Budget Day and before 6 April 2026. Under the new regime, each trust will have its own £1m allowance and the government clearly seeks to prevent the settlement of multiple trusts in an attempt to get around the overall £1m cap. This will make it harder for affected taxpayers to mitigate their future liability in the 17 months before the new rules come into force.
Environmental Schemes and APR
In more welcome news, APR will be extended from 6 April 2025 (only 5 months away) to include agricultural land and businesses which are managed under an environmental agreement with a public body (presumably such as the Sustainable Farming Incentive (SFI)). This will be welcomed as a long overdue reform, reflecting the work being done by rural landowners to improve the quality of their land in line with environmentally sustainable purposes.
Capital Gains Tax
Despite much speculation around Capital Gains Tax (CGT) rates increasing to parity with income tax rates, CGT rates will increase to 24 per cent from 20 per cent from midnight on 29 October 2024. The 24 per cent CGT rate for disposals of residential property is unchanged. There are no proposed changes to CGT reliefs such as Business Assets Holdover Relief for UK taxpayers but CGT rates for Investors Relief and Business Asset Holdover Relief are affected – see our Budget overview briefing for more about CGT.
An early assessment – Awaiting further clarification
While we are barely two days on from the announcement of these changes, they will affect a great number of our clients. There have been no announcements about changes to other exemptions and reliefs from IHT, such as spouse relief, the seven-year gifting regime or conditional exemption for heritage assets and those rules will remain in force. Do remember that these changes are pre-announced and the legislation, which is unlikely to be published straightaway, may contain some differences. We will continue to monitor progress via the consultation process and pending draft legislation over the coming months.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2024
