Inheritance tax changes ahead: time to plan now

Once in a generation tax changes were announced by Rachel Reeves in her Autumn Budget on 30 October 2024 in relation to the inheritance (“IHT”) reliefs available to business and agricultural assets. 

• Download our Autumn Budget 2024 summary (PDF)
• Download our 2025/26 Tax Tables (PDF)

Individuals and families owning businesses should now carefully consider what the changes will mean for them and their businesses and explore what options are available.

In this note we set out the proposed changes, the potential implications and practical considerations, focussing on family-owned businesses.

Business relief has been available since 1976, but it has only been since 1996 that 100% relief has been available for minority shareholdings in private companies, and from 1992 for controlling holdings. 

Since these dates, the ability to pass on business interests on death or to transfer such assets into trusts free from IHT has meant that IHT has often not had to feature in the conversations within a family on the topic of succession, or transfers between family members. 

The fact that on death the assets are inherited at probate value has meant that, as well there being no IHT, the beneficiaries have been able to acquire them at a “re-based” value for capital gains tax purposes. 

The proposed changes announced in the Autumn Budget now fundamentally change the tax position for family businesses in relation to IHT. 

This is our area of focus in this note. 

There were also significant changes to the IHT rules for non-domiciled individuals and for pensions, which we will cover separately. 

What changes were announced?

Firstly, it is worth highlighting that these changes are proposed and are subject to being enacted in law. 

We have relatively little detail yet. We don’t have sight of any draft legislation and there has been no feedback out of consultation exercises. We anticipate that we will only see the draft legislation when next year’s finance bill is published. 

From 6 April 2026, business and agricultural assets will qualify for a £1m allowance of 100% relief and any value in excess of this will be subject to a reduced rate 50% relief. 

Trusts will be affected, although there is some uncertainty around how the changes will apply. 

For relevant property trusts settled before 30 October 2024, each trust should have its own £1m allowance for 100% relief. 

Anti-avoidance rules will, however, apply to trusts settled on or after 30 October 2024 so that the £1m allowance will be split between all new trusts created by that settlor.

The £1m IHT allowance for business property and agricultural property is applied per individual and is not transferrable to their spouse or civil partner. 

This is a different treatment to the £325,000 nil-rate band and the £175,000 residence nil-rate band, which is automatically transferred on the first death. This will require affected individuals to change their Wills with effect from 6 April 2026.

The £1m allowance will not be available for shares designated as “not listed” on the markets of recognised stock exchanges, such as the AIM, where the rate of relief will be reduced from 100% to 50%.

What has not been changed?

Firstly, it is worth pointing out that the changes will not affect any IHT liabilities arising on or before 5 April 2026. 

There are no changes to the headline rate of IHT, which remains at 40%.

The nil-rate band remains at £325,000 and the residence nil-rate band for estates under £2m remains at £175,000. These remain frozen until April 2030. The nil-rate band will have been left at £325,000 since 6 April 2009.

As mentioned above, there are no changes to the capital gains tax market value uplift on death.

There have been no changes to the 7-year window for potentially exempt transfers (PETs). However, there is some speculation that this might be under review for changes to be made in the Spring Statement on 26 March 2025.

What impact will the changes have to individuals & what actions should be taken?

There is still limited detail on certain aspects and some uncertainty on others. Caution is needed before taking steps until there is greater clarity, which we should have when we see the draft legislation and further details from the Government. However, it may not be until later in the year that we see the draft legislation. 

There is also significant lobbying taking place with regard to the impact these changes will have. There is a possibility that the changes will not be enacted as proposed.

What happens if I take no action?

As a starting point, it is important to assess the impact that the changes will have on individuals and their businesses if no action is taken. Consideration should be given to the implication for any trusts that hold shares in the business. 

Modelling the potential IHT charge will help individuals and trustees to compare the costs and implications of an alternative course of action. 

As well as calculating the additional IHT that would be payable, it is important to understand when it would be payable and how it would be funded.

If the IHT liability arising on death relates to BPR or APR assets, the liability can helpfully be settled in annual interest-free instalments over 10 years, as long as payments are made on time.

No funds to pay the tax?

If the estate or family will not have the spare funds to pay the IHT, it might be necessary to withdraw the funds from the company in the form of dividends. 

Understanding how this would impact the business, and its cash flow is important. 

Calculations suggest that to fund an IHT bill of, say, £100,000, this would require profits to be generated of £219,840. This is based on 25% corporation tax and 39.35% income tax on the dividend.

There may be the option for executors to access the funds to settle the IHT by the company undertaking a share buy-back. 

This would mean that the executors could access funds to pay the IHT subject to capital gains tax, rather than income tax. However, this would involve having to evidence to HMRC that any alternative means of funding the IHT would have resulted in undue hardship for the beneficiaries of the estate. This has been a little used tool and it is unclear where the threshold sits for this to be available.  

Should lifetime transfers be considered? 

Given the proposed changes, it may be appropriate to accelerate lifetime transfers within the family, particularly for more elderly shareholders. 

If capital gains gift hold-over relief is available, without restriction, these transfers can be completed between individuals without triggering any tax cost at the point of transfer.

While there can be no immediate tax cost, it would mean that the recipient receives the shares at the original owner's low base cost, without the benefit of any capital gains tax probate uplift. 

It is important to consider whether the conditions for capital gains tax gift hold over relief will be met or whether the hold-over relief might be partially restricted. This can be an unexpectedly complex area, and needs careful analysis to ensure there are no surprises.

The transfer of shares between individuals working in the business needs consideration of the wider tax consequences, particularly the employment-related share rules. 

Where there are lifetime transfers, there are potential IHT consequences if the person making the transfer does not survive seven years. Modelling this scenario is important. However, if the transferor unfortunately dies on or before 5 April 2026, there shouldn’t be any IHT payable. 

Individuals should review their Wills in light of the changes, and to reflect the outcome of their revised plans.

Changes to Wills may be needed in any event to make the most of each individual’s £1m allowance for 100% IHT relief. 

Term assurance

Families may also want to consider how insurance could form a part of the overall plan, whether it is to cover the IHT that can arise if the individual does not survive 7 years after a gift, or in relation to assets that they anticipate passing on through their Will. 

Insurance to cover potential IHT liabilities can provide liquidity on death to fund the IHT. Specialist advice is always needed here.

What impact will the changes have on trusts?

Under the current rules, it is possible to transfer BPR and APR assets into and out of trusts without any charge to IHT. There is also no IHT payable by the trustees on each ten-year anniversary of the trust. 

This will all change from 6 April 2026, and it will be a significant factor for those considering establishing a trust for family succession reasons. 

The good news is that each trust should have its own £1m allowance for 100% relief. There will, however, be anti-avoidance provisions that will apply to trusts created by the same settlor on or after 30 October 2024, which will split the £1m allowance across all relevant trusts. 

Trustees will need to give careful consideration to the changes. Trusts holding BPR and APR assets will need to fund ten-year anniversary IHT liabilities, which will, we anticipate, be up to 3% of the value of the assets. 

The main rate of a ten-year charge is 6%, with the 50% relief reducing this to 3%. Further details are needed from the Government on these aspects. 

If there is not sufficient liquidity within the trust to fund these 10-year anniversary tax charges, it may be that dividends will need to be paid to the trust, which would be subject to income tax at 39.35%. 

Trustees will therefore need to carefully consider their tax cash flow projections.

Trustees may wish to consider the merits and implications of retaining the trusts and it may be that BPR and APR assets could be distributed out from the trust to beneficiaries before 5 April 2026, whilst there would be no IHT implications. Tax is of course only one consideration to take into account in these circumstances.

Given that there will potentially be 10-year anniversary IHT liabilities of up to 3%, consideration will be needed on the long-term cost and benefit position for trusts, particularly where the beneficiaries are very young and there may be multiple 10-year anniversary charges. 

There appears to be a window open until 5 April 2026 enabling individuals to transfer their shares into a trust without triggering an IHT charge on the transfer. 

This may be an appropriate route where a shareholder would prefer not to transfer their shares directly to individuals. The transfer to a trust would enable the person transferring the shares to still have a degree of control in their capacity of being a trustee of the trust. 

Trusts Consultation

At the time of writing this article we were waiting for further guidance from the Government on how the changes will relate to trusts. It was announced at the Autumn Budget that this guidance should be released in ‘early 2025’, and on 27 February 2025 a consultation on trusts was published.

Other points to consider

Undertaking steps to mitigate the impact of the IHT changes will have a number of wider tax, governance and legal implications. Considering the financial security of the person making the transfer, considering whether their retirement plans are secure, is important. Gifting shares in a company would also have implications in terms of voting rights and who would stand to benefit were the company to be sold. 

A final point…

The proposed IHT changes are very significant and are acting as a catalyst for individuals and families to reassess their governance plans and future strategies. We can help frame these conversations and model the implications of these once in a generation changes. 

Taking steps to reduce the impact of the IHT changes could have knock on implications in a variety of tax, family, legal or commercial ways, and so having your advisers work through your options with you has never been more important. 

Many families are taking these changes as an opportunity to engage with their family to discuss their wider succession plans, bringing some positive outcomes from a significant change to the tax reliefs.

If you would like to discuss how these forthcoming changes could impact you and your business, please contact your usual Bishop Fleming advisor, or a member of our Tax Team.