Careful planning required around new Inheritance Tax rules

In her recent Budget, Chancellor Rachel Reeves announced significant changes to Inheritance Tax rules, specifically the availability of Business Property Relief and Agricultural Property Relief. These changes are likely to have a long-term financial impact for those that don’t plan properly in response.

In summary, it will mean that after 5 April 2026, when an individual passes away and they have assets that qualify for Business Property Relief or Agricultural Property Relief, the rate of relief will only be 100% on the first £1m of assets that do not pass to a surviving spouse.

Thereafter, for any assets valued at over £1 million, the rate of relief will be reduced to 50%. This means, on assets that qualify for the 50% Relief (i.e. assets over £1 million) the effective rate of Inheritance Tax will be 20%.

These changes will likely cause great concern for many business owners. Those who have structured their affairs to manage the value that they have created within the business will now need to review and adapt. It’s crutial that robust plans in place to mitigate the impact of these forthcoming changes.

Is it set in stone?

Government consultations on all the changes to Inheritance Tax rules that were announced in the Budget are ongoing. A separate consultation regarding the general announcements on business property relief / agricultural property relief also taking place. Further details are also expected to be released by the government in the coming weeks.

Understanding the impact of Inheritance Tax rules on you

However things turn out, before deciding on what actions you might take, it’s essential that you take informed, professional advice. It’s important to fully understand what your personal IHT position looks like following the changes.

New pension rules will be coming into effect in April 2027, so it would be sensible to wait and see if further details are announced.

However, you could start thinking about the following:

• What level of income do you need for your living costs, and can the pension replace other sources of income?
• How much of your pension income can be drawn in a tax efficient manner to utilise your tax bands?
• Where drawing additional income from your pension could push you into a higher tax band, could tax efficient investments such as the Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT) help mitigate the tax impact?
• Can you utilise the IHT gift exemptions? (Such as through normal expenditure out of income, and to help pass assets to the next generations to reduce your overall IHT liability).

It would also make sense to review any family Wills, as you should be doing regularly anyway, and to consider the cash flow of your executor. This is to ensure they have the resources required to keep running the business.

What does it actually mean?

In terms of paying this Inheritance Tax, if it is required, you will still be able to do so in instalments.

Due to the nature of shares or assets used in a family business, executors of the estate can elect to pay this tax over a ten-year period.

HMRC has said that no interest will be charged on such payments. However, there may be other considerations, such as lending or banking covenants, which make this option impractical.

Insurance could be another effective solution, particularly where there is the ability for the business to fund this tax efficiently. It also allows time for you to plan effectively.

Insurance can be arranged in respect of assets remaining in the Estate or the tax arising on a failed Potentially Exempt Transfer. This enables an individual to make gifts of unlimited value which will become exempt from IHT if the individual survives for a period of seven years.

Owners of family businesses need to be acting now to assess what their current Inheritance Tax position is and how that might change after April 2026.

By ensuring you’re fully aware of the impact of these changes, you can then start to prepare a plan and take the appropriate steps to protect your business and ensure it passes intact to the next generation.

For further advice on all aspects of personal tax and to discuss your personal IHT situation, please contact Chris Moir via advice@r-m-t.co.uk or on 0330 058 6559.