Inheritance Tax (IHT) is a tax usually paid on death at 40% on the value of assets which are not covered by reliefs and exemptions.
Rachel Reeves in her UK Autumn Statement last year announced a number of changes to the UK IHT regime covering the availability of agricultural property relief (APR), business property relief (BPR), tax relief in respect of pensions and the UK IHT position for non-domiciled individuals.
The changes to the UK IHT rules will have significant tax implications affecting agricultural and rural businesses, trading businesses (and especially impactful for family-owned businesses), individuals with significant wealth tied up in pensions, trusts as well as non-domiciles with vast overseas assets.
HMRC has issued a consultation regarding the availability of APR and BPR for assets being transferred into trust or for qualifying APR and BPR assets which are currently held in trust. We would recommend that those looking to undertaken significant tax planning using a trust structure should potentially wait until further details are announced from HMRC in respect of this consultation before taking any significant action.
Below we take you through the potential impact of these changes.
Who will be affected by these changes?
- Agricultural and rural businesses
- Family-owned (trading) businesses
- Trusts
- Non-Domiciles
- Pensions
- Angel Investors and Business Angels
1. Agricultural and rural businesses
Up until now, farming businesses and rural estates could benefit from 100% IHT relief in the form of agricultural property relief (APR) and business property relief (BPR) on whole, or part, of the business/estate. The availability of APR and BPR meant that these enterprises could be passed on to the next generation on death without any IHT being payable.
Going forward, from 6 April 2026, APR and BPR benefits will be watered down with only the first £1million of qualifying APR and BPR assets being free of IHT. Qualifying assets in excess of £1m will now be taxed at an effective rate of 20%.
The changes above bring into sharp focus, the longer-term viability of the farming business, especially if there is no natural successor and the next generation are not interested in taking on the business.
Business owners should therefore start considering their options to plan for the upcoming IHT changes, this may include:
- A sale of the whole, or part of, the farming business/estate. A disposal may potentially qualify for tax reliefs, such as Business Asset Disposal Relief which is a modest tax charge compared to current IHT rates.
- Starting, or ramping up, diversification of the business by undertaking on non-trading activities to provide the business with additional revenue and liquidity for the estate on death to settle IHT falling due.
- Making a lifetime gift of the business/estate to the next generation direct or via a trust which, under the right circumstances, can still be a tax efficient way of passing wealth to next generation.
- Taking out appropriate IHT insurance to cover the potential IHT which may fall due on the value of the family business which may be exposed to IHT on death (post these rule changes), or to cover the potential IHT charge on any lifetime gifts.
Business owners must understand all options available and take the appropriate action based on their individual circumstances. HMRC has issued a consultation regarding the availability of APR and BPR for assets being transferred into trust or for qualifying APR and BPR assets which are currently held in trust. We would recommend that those looking to undertaken significant tax planning using a trust structure should potentially wait until further details are announced from HMRC in respect of this consultation before taking any significant action.
2. Family-owned (trading) businesses
The changes announced to BPR are expected to have a profound effect on UK business moving forward, acutely impacting family-owned trading businesses where the operations, management and ownership of the business transition from one generation to the next generation.
Prior to the 2024 Autumn Statement, the availability of BPR meant that business interests (shares in a trading company or partnership/sole trade business) could be passed on to the next generation or other heirs without any IHT being payable. However, from 6 April 2026, 100% BPR will be capped to £1million. Qualifying assets in excess of £1m will now be taxed at an effective rate of 20%.
The changes in the budget, will bring sharp focus how best to manage this transition given the loss of these IHT reliefs. This may mean plans being revisited in terms of how best to manage the transition, taking into account the impact of the proposed changes to the IHT rules. Things to consider:
- Taking out appropriate IHT insurance to cover the potential IHT which may fall due on the value of the family business which maybe exposed to IHT on death (post these rule changes), or to cover the potential IHT charge on any lifetime gifts.
- External financing, whether it be in the form of a loan or from external investors maybe required to help foot the IHT bill on death.
- Using a company share buyback and the company’s undistributed profits to buy back the shares of the deceased shareholder.
- Use of a trust structure and transfer of shares into trust. Business owners should wait the output of this consultation as Trusts may be another means of passing on assets in lifetime.
- Selling the family business maybe become a more commercially attractive option, especially if the sale of the family business qualifies for business asset disposal relief (BADR) and the lower capital gains tax (CGT) rates.
Business owners must understand all options available and take the appropriate action based on their individual circumstances. HMRC has issued a consultation regarding the availability of APR and BPR for assets being transferred into trust or for qualifying APR and BPR assets which are currently held in trust. We would recommend that those looking to undertaken significant tax planning using a trust structure should potentially wait until further details are announced from HMRC in respect of this consultation before taking any significant action.
3. Trusts
The changes announced to the availability of APR and BPR will potentially bring more trusts within the scope of UK IHT.
In the UK, trusts are subject to their own specific IHT regime whereby they are subject to periodic IHT charges every 10-year anniversary of the trust (from the date it was originally established) and on capital distributions from the trust, i.e. when assets are transferred out of trust.
For certain trusts the availability of 100% APR and/or BPR means that no IHT arises at each 10-year anniversary nor when assets are distributed from the trust to beneficiaries. However, if the changes in the Autumn Statement were to proceed as announced, this would mean the loss of APR and BPR which would bring the trust into the scope of IHT.
Trustees will need the review the IHT position of their trust and consider the impact that these potential changes could have, in particular the cashflow implications of funding any potential future IHT liabilities. Trustees should therefore consider what action can be taken to mitigate/plan for upcoming IHT charges as well as reflect if now is the time to unwind and distribute the trust assets to the beneficiaries.
HMRC has issued a consultation regarding the availability of APR and BPR for assets being transferred into trust or for qualifying APR and BPR assets which are currently held in trust. We would recommend that those looking to undertaken significant tax planning using a trust structure should potentially wait until further details are announced from HMRC in respect of this consultation before taking any significant action.
4. Non-Doms
At present non-UK domiciled individuals are only subject to UK IHT on their UK assets rather than their worldwide estate. The domicile-based system of IHT will be replaced with a new residence-based system, due to take effect from 6 April 2025.
An individual who is long-term resident (and in scope for IHT on their non-UK assets) when they have been resident in the UK for at least 10 out of the last 20 tax years and then remain in scope for between 3 and 10 years after leaving the UK (depending on how long they were resident in the UK prior to their departure from the UK). Whilst this gives individuals more certainty about when they will be are subject to UK IHT, it could also bring a significant number of people into the UK IHT net who previously were not.
For individuals affected by these changes, as a first step, they should consider the impact that these changes could have on their UK (and overall) IHT exposure, given that their overseas assets (without undertaking any planning) may be caught in the UK tax net. Once this has been quantified, planning can be undertaken to minimise the UK IHT burden on the estate.
5. Pensions
Pension pots have historically been out with the scope of IHT on death. However, following the changes which were announced in the 2024 Autumn Statement 2024, with effect from 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes. As a consequence, this could bring the value of the unused pension pot into the scope of IHT, resulting in significant IHT liabilities.
Although these changes are not due to take effect until 6 April 2027 and we await further detail from HMRC regarding how the rules will work in practice, individuals affected by these changes may wish to consider the impact of these proposed rules will have on their overall IHT position, and may want to take action prior to the changes coming into effect. Things to consider include:
- Individuals who have previously nominated other family members to inherit their pension may prefer instead to nominate their spouse or civil partner to inherit all of their pension post April 2027, and ensure that utilise the spousal exemption and avoid an IHT charge occurring in respect of the pension pot.
We recommend that independent financial advice when it comes to pension planning and the impact that this could have on financial and investment matters.
6. Angel investors and business angels
Previously, angel investors who invested in qualifying SEIS and EIS companies would have benefitted from 100% BPR on the value of their investment so long as their shares were held for 2-years, and therefore no IHT would fall due on death in respect of their investment in these companies.
From 6 April 2026, the introduction of the £1m BPR (and APR) allowance could potentially mean that the value of these investments will be exposed to IHT in future. For individuals who may be affected by these changes, they may wish to consider the impact on their UK IHT exposure.
In particular, consideration will need to be given regarding now these investments would be valued from an IHT perspective, taking into account the unique nature of these business, given often they are of higher risk and the minority holding held by many Angel Investors.
Planning prior to 6 April 2026
Individuals, trusts, families and business owners affected by these changes will need to revisit their current estate, IHT and succession planning position and consider the impact of these changes of the current plans which have been put in place.
If you have any questions, please contact your usual CT contact or our Personal Tax specialists at personaltax@ct.me.
