Changes to Inheritance Tax

As you may be aware from recent Budget announcements, which have been widely reported in the press and covered in our own electronic updates and recent Budget seminars, significant changes to Inheritance Tax have been proposed.

If these measures are implemented, the 100% relief currently available on business and agricultural assets, whether transferred on death or as lifetime gifts, may no longer qualify for full relief.

During the October 2024 Budget announcements, two major proposals were announced;-

• Revised relief rules for Agricultural Property Relief (APR) and Business Property Relief (BPR)
• Potential changes to inherited pension pots (from April 2027)

Below we have summarised the changes and outline our preliminary recommendations on how these may affect your estate planning. We appreciate that these new rules are complex and also, we have to bear in mind that what was proposed may not come into force as originally announced.

Therefore, a degree of caution is required to ensure that no ‘knee jerk’ reactions are undertaken especially as the draft legislation still has not been released and also pressure on the current government that you will have seen in the news.

Background to IHT and overview of current rules

 

Inheritance Tax is generally charged at 40% on the value of an individual’s estate exceeding the available nil-rate bands. Commonly, each individual has:

• A standard nil-rate band of £325,000, and
• A residence nil-rate band of £175,000 (subject to taper if the net estate exceeds £2 million).

Where applicable, unused reliefs can be transferred to a surviving spouse or civil partner, potentially allowing up to £1 million of combined nil-rate bands on second death.

The above rules have not been and are not subject to change, meaning that if you have non-business-related assets only such as the family house and listed investments or cash, any planning undertaken should not be affected.

In addition to the above, Additional reliefs for IHT may be claimed for business and agricultural assets (including shares in companies and unincorporated businesses), including:

• Agricultural Property Relief (‘APR’) – For those with agricultural property or farmland used for agricultural purposes.
• Business Property Relief (‘BPR’) – For those owning certain trading businesses and unquoted securities (including shares in the Alternative Investment Market (AIM)).
• Exempt transfers of business Assets – Between spouses, civil partners, and gifts to charities during a person’s lifetime (Subject to the 7-year rule).

Both APR and BPR have historically been available at rates of up to 100%, meaning potentially no IHT payable on qualifying assets on death or when gifted during a person’s lifetime.

Proposed changes to APR and BPR – announced in the October 2024 Budget

 

The October 2024 Budget introduced substantial changes to Inheritance Tax (IHT) reliefs, most notably APR and BPR. These proposals include:

• Capping the value of qualifying property eligible for full APR at £1 million
• Applying a similar threshold across both APR and BPR combined
• Reducing the relief available on Alternative Investment Market (AIM) shares to 50%

If enacted, these amendments will significantly affect the IHT position of agricultural and business assets, potentially requiring a review of current wills, lifetime gifting strategies and overall succession planning.

Although these reforms are expected to take effect from April 2026, it is important to note that draft legislation has not yet been released. Further, there is significant pressure from professional bodies, industry groups, and affected taxpayers urging the Government to reconsider or refine the proposals before formal enactment.

 

Agricultural Property Relief (APR)

 

Introduction of a £1 million cap for 100% APR

• From April 2026, landowners (or their estates) will only be able to claim 100% APR on up to £1 million worth of qualifying agricultural property.
• Any agricultural property value above £1 million will only attract 50% relief.
• The existing 50% APR category remains unchanged for certain land under a Farm Business Tenancy (FBT).

Non-transferability of the £1 Million allowance

• Unused portions of this new £1 million APR allowance will not pass on to a surviving spouse or civil partner.
• This could necessitate additional lifetime planning options (e.g., shared ownership of farmland, planned gifting, and reviewing wills).

 

Business Property Relief (BPR)

 

Combined APR/BPR Cap

• Similarly, from April 2026, there is a single £1 million allowance for both APR and BPR combined.
• For example, if £400,000 is used for 100% APR, you can only use £600,000 for 100% BPR.
• Any qualifying business assets beyond that total threshold will receive only 50% relief.

AIM Shares – BPR changes

• From April 2026, unquoted shares listed on AIM will attract only 50% relief, rather than 100%.
• Unlike shares in a personal company, AIM shares do not qualify for the £1 million allowance and will only attract BPR of 50%.

 

Key considerations and potential impact

 

Liquidity concerns

For many farmers and business owners, the most pressing issue is cash flow to settle any resultant IHT liability. Agricultural and business assets are frequently high in capital value but produce a modest yield, making a 20% effective IHT charge (i.e., 50% relief instead of 100%) more challenging to fund.

Valuations

With a new cap in place, valuations are likely to attract increased scrutiny by HMRC. Rigorous valuation methodologies and record-keeping will be essential to support any relief claimed.

Lifetime planning and gifting

Earlier lifetime gifts or reorganisations (e.g., introducing family members as partners/shareholders) might help mitigate IHT exposure, although this often requires surviving seven years to avoid a charge on the gift.

However, many people hold on to shares and business assets to protect them and maintain control because of family dynamics. Therefore gifting assets, may not be the correct choice and the use of a trust may well be an option even if there is a IHT charge.

Complexity

By restricting the transferability of the £1 million allowance and applying it equally to both APR and BPR, estates that currently claim both reliefs will need additional planning and advice to optimise reliefs.

Interaction with Nil-Rate Bands

The standard and residence nil-rate bands remain available. However, the possibility of losing the residence nil-rate band for estates above £2 million still applies, underscoring the need for coordinated planning.

 

Pension pots brought into IHT from April 2027

 

The government also intends to include unused pension funds within a deceased’s estate for IHT purposes from April 2027. Although the income tax treatment for beneficiaries remains unchanged, this means:

• Pension scheme administrators will report the pension value to HMRC for IHT calculations.
• Executors must consider pensions when completing IHT forms, adding new administrative burdens.
• Where the deceased was over 75, beneficiaries continue to pay income tax on withdrawals at their marginal rates, but now there may be an additional IHT charge at 40% (or lower if reliefs apply).

While pensions were traditionally seen as outside one’s estate for IHT, this new rule may prompt further planning opportunities and discussions should be held with an Independent Financial Advisor, once the new rules are announced as this is only under consultation at present.

 

Recommended next steps

 

It is important to review your current estate, business structures and agricultural holdings in light of the proposed changes to Agricultural Property Relief (APR) and Business Property Relief (BPR). Although the legislation is not yet finalised, early preparation can mitigate potential risks.

We recommend the following actions:

Property and business valuations

Timely valuations will help determine whether the combined APR/BPR relief cap of £1 million is likely to be exceeded and allow for proactive planning.

Review wills and estate plans

Proposed IHT changes may render existing wills and estate plans less tax-efficient. Reviewing ownership structures (e.g., joint ownership of farmland or business assets) may help optimise reliefs available.

Consider lifetime gifting and reorganisations

Lifetime giving and restructuring can reduce IHT exposure if implemented well in advance, but it must be balanced with control and management considerations.

Pension planning

Pensions could soon be brought within the scope of IHT, making it important to integrate them into estate planning strategies.

Explore debt financing options

Many agricultural and business assets are illiquid, creating potential cash flow issues when an IHT liability arises. Financial flexibility now can protect family assets from forced sales.

 

Concluding remarks and assistance from Cottons

 

Whilst we recognise that many of these measures are still being finalised, these Budget announcements mark a significant shift in the Inheritance Tax (IHT) landscape. As your accountants and tax advisers, our priority is to ensure you remain informed and well-prepared. We will continue to monitor legislative developments and provide you with further updates as they arise.

We propose arranging a meeting to discuss your current position in detail and identify any steps required to align your affairs with the new legislation once it is enacted. As part of this process, we will agree a fee for conducting a full review of your estate, along with any necessary planning measures.

Given the far-reaching nature of these proposals, there has been unprecedented demand for specialist advice throughout the industry, and we are committed to scheduling sufficient time and resources to provide you with the best possible service so your needs are met.

Furthermore, to help clients navigate these changes, we will be hosting a series of seminars throughout 2025. These sessions will provide guidance on the practical implications and any further clarifications issued by the Government. If you are interested in attending, please email us at enquiries@cottonsgroup.com to register your interest.

Dates and registration details will be communicated on our website and socials in due course so that you, and any other family members or associates who might be affected, can attend and stay fully informed.

In the meantime, if you have any questions or concerns, please do not hesitate to contact us. We appreciate your continued trust in our services and look forward to assisting you as these reforms progress.