I have previously emailed/posted to our website, the proposed changes to inheritance tax Business Property Relief (called Business Relief by HM Revenue & Customs (HMRC)) and Agricultural Property Relief (see here) following the initial announcement at Budget 2024 and also reported on the small amendment to the proposals around the transferability of the cap/allowance announced in Budget 2025 (here).
Increase to the Business Property Relief and Agricultural Property Relief Cap
It has today been announced by the government that the previously proposed £1m cap/allowance in relation to claims for 100% inheritance tax Business Property Relief and Agricultural Property Relief will be significantly increased to £2.5m.
The government announcements so far can be found here and here.
This significant increase to the cap/allowance, now means that spouses or civil partners can hold up to £5m (£5.65m taking into account the standard nil-rate bands) in qualifying agricultural or business assets between them without incurring inheritance tax.
Planning Considerations Following the Increase
The increased cap/allowance inevitably moves many clients out of the impact of the changes, albeit those with higher value assets will still be caught and should continue with mitigation planning. Such planning opportunities available to mitigate the impact of this liability arising on such qualifying assets, including:
- Gifting assets qualifying for 100% APR and/or BPR to attempt to “beat” the 7 year clock.
As with any gifts, other factors need to be considered – such as ability to fund your desired standard of living, business management considerations given new owners/shareholders, family law considerations, capital gains tax and other tax positions (which we, of course, will consider as part of any advice).
- Many clients prefer to gift into formal trusts, as opposed to gifting assets directly to individual recipients, given the practical benefits of maintaining control over the assets and mitigating the risk of the assets being subject to any divorce (or bankruptcy) proceedings the relevant beneficiaries may be party to in the future, amongst other risks. There is the ability to make gifts into a formal trust with a value in excess of the £2.5m cap/allowance tax-free before 6 April 2026 – which could be extremely valuable.
- Given that beneficiaries of shares in unquoted trading companies and interests in trading partnerships, or death estates holding such assets, may need to sell the shares/interests to settle the inheritance tax liabilities, thought should be given to obtaining corporate legal advice to ensure that the governing documentation (Articles of Association and shareholders’ agreements for limited companies, and partnership agreements for partnerships) are robust and enable shares/interests to be acquired smoothly. Additionally, the business or other partners/shareholders may want to consider insuring the lives of shareholders/partners to ensure funds are available to acquire the relevant shares/interests.
- Trustees of trusts owning assets qualifying for 100% BPR and/or APR should consider their options given that the assets will be subject to inheritance tax charges in the future.
Why Caution and Ongoing Review Are Still Required
Whilst the increased cap/allowance inevitably moves many clients out of the impact of the changes, I would still guard against ceasing all concerns for the following reasons:
- There is a long history of once a limit, cap or allowance is introduced (as is the case here), it is not long before the value of that limit, cap or allowance is changed – likely here reduced. Therefore, this temporary reprieve may be short-lived.
- The unrestricted availability of both 100% BPR and APR has unfortunately been a reason why proactive succession planning has typically been delayed or “put off”. The “silver lining” to the announcements has been that business owners and qualifying asset owners have actively engaged in a decision making process around their succession options and sought advice. The Budget 2024 announcements brought to the fore considerations around what business owners want to do with their business/business interest – and potentially resulted in changes to these plans, whether those involve succession, an exit planning or continuing to own the business/business interest (requiring thoughts around the sustainable continuation of the business).
In many cases these decisions still need to be made from a practical and commercial estate and succession planning perspective. It would be a shame to lose this momentum.
- Many business owners and qualifying asset owners are under the misapprehension that their asset qualifies for 100% relief when it doesn’t – either not qualifying at all, qualifying for a reduced rate of relief or some element of the value not qualifying for any relief. These are particularly complex areas requiring specialist tax expertise. We’d recommend seeking specialist tax advice to ensure that there are no surprises here, and if the entire value of the asset/s do not qualify for 100% relief, that planning is carried out to maximise the position.
- Assets can cease to qualify for 100% APR and BPR for many reasons, which leads to a sizeable increase in an individual’s exposure to inheritance tax – a future sale of those assets, for example, when the value ceases to qualify on the signing of the sale documentation, or a change in the use of an asset. If such changes are possible, we would recommend seeking advice and implementing planning in order to mitigate the impact of losing the benefit of 100% relief in the future.
Next Steps and Reviewing Your Inheritance Tax Position
Whilst these changes are obviously welcomed by many clients, I would urge for the relief to be slightly tempered and positions reviewed for the above reasons. Additionally, the proposed changes to remove the inheritance tax exemption from pension funds on death from 6 April 2027, mean that all impacted clients are advised to review their inheritance tax positions.
We know that the volatility in the tax landscape is worrying and disconcerting for clients. Sudden announcements like this within a month of a Budget and two days before the biggest annual holiday of the year don’t help! But please know that, as always, we are here you to discuss your thoughts and to provide proactive, practical advice when you need it.
