Labour’s first Budget brought significant changes to the inheritance tax (IHT) regime that will have a wide-ranging impact for many families and business owners.
Reform to agricultural property relief (APR) and business property relief (BPR)
Currently, qualifying agricultural and business property can benefit from unlimited 100% relief from IHT. The purpose of the reliefs is to ensure that businesses and farms do not have to be sold or broken up to pay IHT following the death of the owner.
The government is now proposing to cap the 100% APR/BPR reliefs as they claim ‘it is not fair or sustainable for a very small number of claimants each year to claim such a significant amount of relief’. From 6 April 2026, 100% APR and BPR will only apply up to a combined limit of £1 million per individual. Only 50% of any value in excess of the £1 million allowance will qualify for APR/BPR relief, which means an effective IHT rate of 20% will be payable for value above £1 million. Unlike the IHT nil-rate bands, any unused allowance will not be transferable between spouses and civil partners. This means that many couples will need to review their wills and how they hold APR/BPR qualifying property to ensure that each person benefits from their £1 million allowance.
The £1 million allowance will cover the following: qualifying property in the estates of deceased individuals, lifetime transfers to individuals in the seven years before death and transfers into trust during lifetime.
On a more positive note, no changes were announced to the tax treatment of lifetime transfers of assets between individuals, which should continue to be exempt from IHT after the seven-year period from the date of the transfer. It is therefore likely that many business owners will increasingly need to consider lifetime asset transfers as part of their IHT planning strategy. Before 6 April 2026, there may be some benefit in considering gifting agricultural or business property into a trust, which may continue to benefit from up to 100% unlimited relief on the initial transfer under the existing rules.
However, lifetime asset transfers must be considered carefully, as it is proposed that the new rules will apply to transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026. As such, lifetime gifts would need to be survived by seven years to fall outside an IHT charge completely. Otherwise, relief would apply at the new reduced rates on any additional IHT payable on the death of donor after 6 April 2026. The capital gains tax consequences would also need to be considered for any lifetime asset transfers.
The obvious concern for business owners affected by the changes will be how their estate will fund the IHT without selling or breaking up the business. One option that business owners may now consider is taking out life insurance to protect against the risk of tax exposure on death. The ability to pay IHT on agricultural and business property in equal annual instalments over ten years will also continue to be available, but these should be interest-free.
Trusts
The new restrictions to these reliefs will also apply to trustees. The combined £1 million allowance to which 100% APR/BPR relief applies will be available on each ten-year anniversary charge and exit charge. The allowance will apply to each existing trust, except if settlors set up multiple trusts on or after 30 October 2024, in which case the £1 million allowance will be divided between them.
This means that existing trusts that may not have historically paid IHT due to APR/BPR will need to be reviewed. This will be particularly important for trusts holding illiquid assets, such as shares in the family business, where the options for funding the IHT may be limited.
AIM shares
A further change announced from 6 April 2026 is that shares, such as AIM shares, which are designated for certain tax purposes as not listed on a recognised stock exchange will attract BPR at a reduced rate of 50%. The £1 million 100% relief allowance will not apply.
It is worth noting that the inheritance tax changes announced are policy proposals and there will be a consultation in early 2025 to consider the detailed application of the policy proposals.
Pensions
Currently, unused pension pots are generally exempt from IHT and have historically been used as an efficient way to pass wealth to the next generation.
This will change as the government announced that unused pension funds and death benefits payable from a pension will be brought within the scope of IHT from 6 April 2027. As part of these changes, pension scheme administrators will be responsible for reporting and paying any IHT due.
Currently, nothing has been published to suggest that the income tax treatment for beneficiaries inheriting pension pots will change. This could mean that pension pots for those who die after the age of 75 could be subject to both IHT and income tax, resulting in an effective tax rate of up to 67% for an additional rate taxpayer.
This measure will mean that individuals may need to reconsider how they use their pensions in retirement, particularly where the inclusion of pensions may cause the value of the estate to breach the £2 million threshold at which the additional residence nil-rate band of £175,000 begins to be tapered.
The inheritance tax changes announced will undoubtedly impact long-established plans for many families and businesses. There will be no one-size-fits-all answer, so it is important that advice is taken before taking any action in response to the proposed changes.
If you want advice on how these changes may affect you, please contact your usual Moore advisor.