The UK government’s planned inheritance tax (IHT) relief changes have caused significant concern among business owners, particularly in agriculture and family-run enterprises.
Announced in the Autumn Budget 2024, the government is proposing to reform IHT agricultural property relief (APR) and business property relief (BPR) from 6 April 2026. Relief of up to 100% is currently available on qualifying business and agricultural assets with no financial limit. From 6 April 2026, it is proposed that 100% relief will only apply to the first £1 million of combined agricultural and business property, with the relief reducing to 50% on the value that exceeds £1 million. This means the relief will be focused on small family farms and businesses.
For those affected, this could mean a substantial tax bill when passing assets down to the next generation, potentially leading to the sale of business assets or land just to cover IHT liabilities.
Why we recommend a cautious approach
At this stage, we are advising clients not to make hasty decisions based on these announcements. The reasons for this are:
- The changes are not due to take effect until April 2026, allowing time for planning.
- We have not yet seen draft legislation, and details could still change.
- There has already been significant backlash from business groups and politicians, which may lead to modifications or even a reversal of the proposals.
If the changes do proceed as planned, we’ve pulled together a number of key considerations for those affected.
Key considerations for business owners
Consider life insurance for tax planning
- A well-structured life insurance policy can help provide funds to cover IHT liabilities, preventing the need for forced asset sales.
Review and update wills
- Assets can still pass between spouses tax-free. However, early indications suggest that the £1 million cap on APR and BPR will not be transferable between spouses.
- There may be a tax advantage in passing £1 million of eligible assets directly to the next generation on first death, rather than waiting until the surviving spouse’s passing.
Explore lifetime gifts
- Gifting assets early can remove them from the estate if the donor survives seven years, reducing IHT exposure.
- Careful planning is needed as lifetime gifts may trigger Capital Gains Tax (CGT).
- Where applicable, gift relief may help defer CGT on transfers.
Consider business restructuring
- Businesses with a mix of trading and investment activities may benefit from demerging, allowing only the trading side to qualify for gift relief and minimising IHT impact.
- Those with non-trading assets (e.g., rental properties) should seek expert advice before making transfers.
Evaluate divestment options
- If succession planning is unclear, selling the business may become a more attractive option.
- CGT on business sales increased from 20% to 24%, but this remains lower than the potential IHT burden.
- Post-sale, gifting the proceeds may allow for tax-efficient wealth transfer.
How can we help?
With uncertainty around these changes, careful planning is crucial. While the government’s final decision remains to be seen, business owners should review their estate plans, explore tax-efficient structuring and seek professional advice.
“For farming and family-run businesses, cash flow is already tight. A sudden IHT bill could mean selling off land, shares or even shutting down operations which would be a tragic loss, particularly for those businesses which have been passed down through the generations.” comments Amie Wilson, Associate Director. “Business owners must invest time exploring their options now, so that they are well positioned as the finer details are confirmed in due course.”
If you need guidance on planning for these changes, please contact your usual relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616.