Inheritance Tax

Measures to reform Agricultural Relief (AR) and Business Relief (BR) were amongst the most eye-catching of the announcements in the recent Budget. The reforms are far reaching and may have implications for those holding business assets, or agricultural land and property. The measures, which are effective from April 6^th 2026, will limit the extent of tax relief that is currently available. As a consequence, individuals with substantial agricultural or business holdings may well need to reconsider their succession or exit plans.

The current reliefs

AR and BR provide the ability for families and businesses to transfer wealth and assets between generations, without incurring significant Inheritance Tax (IHT) liabilities. The reliefs allow up to 100% IHT exemption on qualifying agricultural or business assets.

AR applies to both land and buildings which are used for agricultural purposes, and 100% relief from IHT is available if ownership and operational conditions are met.

BR provides relief when holding qualifying business interests, including shares in unquoted companies.  BR also extends to ownership of unincorporated business interests, such as those held in a partnership. As with AR, 100% IHT relief is available for most business property.

In both instances, a qualifying holding period of at least two years is required. In the case of agricultural relief, the two-year period applies to property which is occupied by the owner or spouse, and remains held at date of death. A longer seven-year qualifying period applies to land which is occupied by someone else. For business property, qualifying shares need to be held for two years and continue to be held at date of death.

Changes in the 2024 Budget

The most significant reform announced in the recent Budget was the introduction of a cap on the combined amount of AR and BR available, which applies from April 2026. Under the new cap, only the first £1m of qualifying assets held by each individual will attract 100% relief from IHT. The new £1m cap covers qualifying property (be it for AR or BR) which are held at the date of death, and lifetime transfers of qualifying property within the seven years before death. In the case of lifetime transfers, the rules capture any transfers of qualifying property on or after 30^th October 2024, where the individual making the transfer dies after 6^th April 2026.

Once the £1m cap has been breached, qualifying assets above this level will only receive half of the IHT relief, which results in an effective IHT rate of 20% on qualifying assets held above £1m.

It is important to note that the Nil Rate Band and Residence Nil Rate Bands will remain unchanged, and these allowances will still be transferable between couples, so that a couple could potentially leave £1m of assets on the death of the second of the couple.

In respect of the new combined cap for BR and AR, the allowance is given to each individual and is not transferable between spouses. Depending on how assets are held, each of a married couple could leave £1m of assets that qualify for BR or AR to the next generation, in addition to the combined £1m nil-rate bands. In total, a maximum of £3m could, therefore, qualify for IHT exemption.

AIM-Listed Shares

Shares in companies listed on the Alternative Investment Market (AIM) currently qualify for 100% relief under BR, in the same manner as unquoted qualifying companies. From 2026, the relief on AIM shares will be reduced to 50%, leaving AIM shares subject to an IHT rate of 20%, assuming all nil rate bands have been used with other assets.

What the changes will mean in practice

It is fair to say the new proposals have been met with fierce resistance, in particular from the farming community. Whilst it is conceivable that the measures could be watered down in advance of the date of introduction in April 2026, it would be sensible for those holding business or agricultural assets to begin assessing their current position and consider any action that may be necessary to reduce the potential tax liability.

For anyone holding business or agricultural assets, it is important to obtain an updated valuation of these assets, so that the true value of the potential liability can be ascertained. Without an accurate valuation, it is difficult to make sensible decisions, and it is also appropriate to bear in mind that it is the valuation in the future that will be assessed for IHT and not today’s value. It may well, therefore, be sensible to factor in growth in the value of land or property over time.

Business owners may well need to reconsider their succession plans as a result of the change in legislation. It has often been the case that those holding qualifying business assets would simply hold the asset until date of death, when the shares would then be transferred to the next generation, without IHT applying (as the shares are qualifying) and the new owners who inherit the property also benefit from an uplift on the base cost to market value. Given the new rules, it may be necessary to reassess options, and depending on individual circumstances, making lifetime gits of assets may become more attractive. There are also alternative options, such as taking out life assurance, where the policy proceeds on a death claim are paid into trust, and then used to settle part or all the IHT liability.

Getting the right advice

The 2024 Autumn Budget has heralded significant changes in the way agricultural and business property is treated for IHT purposes. The proposed £1m combined cap from April 2026 presents significant challenges for families and businesses with substantial business and agricultural assets. Seeking professional advice is critical to navigate these complex and far-reaching reforms, and advice may need to cover both financial and legal aspects, as changes to existing wills or the way property ownership is structured may well be needed. Speak to one of our experienced advisers if you may be affected by the change in tax rules.

Inheritance Tax (IHT) planning was once only considered necessary for the very wealthy; however, largely because of increases in property and asset prices, many more estates are now liable to IHT. The most recent data from HMRC showed that IHT receipts were £3.5bn for the three months to August 2024, an increase of 10% over the same period last year. Whilst this upward trend is likely to continue, careful financial planning can help reduce or eliminate an IHT liability and leave a greater proportion of an estate to beneficiaries.

IHT legislation

Existing tax legislation provides each individual with a ‘nil rate band’ of £325,000 which is exempt from IHT. Married couples can use two nil rate bands on second death meaning that estates valued at less than £650,000 will pay no tax. This can be further extended by the ‘main residence nil rate band’ which can be claimed in respect of the main family home, of £175,000 per individual, as long as the home is left to a direct descendant.  The main residence band can also be transferred between married couples, and as a result, a total of £350,000 can be covered by the main residence band on second death.

Any amount exceeding the total ‘nil rate band’ is taxed at 40%, which can have a major impact on the legacy you leave to your beneficiaries. There are, however, a range of financial tools available to help mitigate a potential IHT liability.

IHT mitigation via life assurance

Amongst the IHT mitigation strategies available for consideration, life assurance could be a sensible option that is worth considering. A specific type of life assurance policy, known as a Whole of Life policy, is used for this purpose. Unlike traditional term assurance policies that provide cover for a set period, Whole of Life protection is designed to cover the life insured for the rest of their life, as long as the insurance premiums continue to be paid.

Whole of Life cover can either be taken out on a single life assured, or jointly. For married couples, where their estates are left to each other on the first to die, the IHT liability will generally arise on the second death, and therefore joint policies are often established on a “joint life, second death” basis.

The key planning element when using a Whole of Life policy is to ensure that the policy is written into trust, so that the payment on death does not aggregate with the individual’s other assets when their estate is assessed for IHT purposes. On death, the trustees use the policy proceeds to pay towards the IHT liability on the estate, which could potentially be covered in full.

Depending on the policy options chosen, the life assurance premiums can be guaranteed, in other words they remain unchanged for the life of the policy, or reviewable. Choosing the latter option will lead to cheaper premiums in the early years of the policy, but premiums will increase over time. The level of premium payable will be determined by an underwriting process, where the premium takes into account the age, health and lifestyle of the applicant. In most cases the policy will not pay out in the event of death within the first 12 months of the policy.

It is important to ensure that premiums remain affordable throughout the life of the policy. As a result, we often provide advice to help clients generate an income stream from existing investments, which can be used to pay the monthly or annual premiums.

Selecting cover options

When we sit down with clients to look at IHT planning options, we stress the importance that determining the value of an estate is just a “snapshot” of the current position of their existing assets. Of course, the value of an estate can shift significantly over time, either due to increases in the value of investments or property or further inheritance received. It could also be reduced, due to the eroding costs of long-term care, or other planning measures undertaken, such as direct gifting to family members.

It is also important to appreciate that IHT legislation can alter over time, and although the nil rate band hasn’t increased since 2009, the introduction of the main residence band in 2016 is a good example of how changes in legislation can impact on existing planning measures put in place.

Some Whole of Life policies allow the sum assured to be increased over and above increases in prices generally, which is an option that is available in most cases. That being said, given the relative inflexibility of Whole of Life policies, it may be appropriate to consider using protection policies as part of a broader strategy to mitigate a potential IHT liability.

The power of independent advice

Although IHT receipts are increasing, by planning ahead, the impact of this tax can be avoided or even eliminated. Our experienced holistic planners can fully assess the potential IHT liability on your estate and consider the options, including protection policies written in trust, as part of a broader financial planning strategy. Speak to one of the adviser team to discuss what action may be appropriate to meet your circumstances.

Our advisers provide holistic and independent advice to clients with a wide range of different financial circumstances and objectives; however, one common discussion point for many clients centres around the rules for gifting money, and how to avoid tripping off a tax charge when making a gift.

There are many reasons that individuals may wish to make a gift. A popular reason is to provide a younger relative with funds towards a house deposit, or cover university costs. Others may look to gifting as a method of reducing the value of their estate that is chargeable to Inheritance Tax.

It is, however, important to seek expert advice before undertaking any estate planning, as the rules can be difficult to understand, and actions taken can have unexpected and expensive consequences.

What constitutes a gift?

It may seem a simple question, but it is important to note that a gift needs to be outright to be effective for tax purposes. In other words, the donor of the gift is not able to derive any benefit from the asset that is gifted. If they do, they are likely to fall foul of the reservation of benefit anti-avoidance rules, which could render the gift as being null and void. The most common example of such a gift is when parents gift their main residence to their children, and then continue to live in the property. This is a clear example of a reservation of benefit, unless a market rent is paid by the parents.

Annual gift exemptions

Each individual has an annual gift exemption, where gifts below this figure can be made each year without incurring a potential charge to Inheritance Tax in the future. The annual gift exemption is only £3,000, and sadly this figure hasn’t been increased in more than four decades. Despite the size of the allowance, the annual gift exemption can still be of value, in particular as a couple could each use their annual gift exemption. In addition, if you haven’t made gifts in the previous tax year, this can be carried forward to allow a potential total gift of £12,000 per couple in a single tax year.

One source of confusion is the fact that the £3,000 allowance needs to cover the total of gifts made in a tax year. You can also make small gifts of up to £250 per person each tax year, so long as you have not gifted to that individual under another allowance during the same tax year.

Finally, gifts can be made to a relative who is getting married or entering a civil partnership. Parents can give £5,000 each, grandparents can give £2,500 each and you can give £1,000 to any other person.

 Tax treatment of larger gifts

There is no limit to the amount you can gift each tax year; however, any gifts made in excess of the annual gift exemptions outlined above could carry a potential Inheritance Tax charge. For a gift in excess of the annual gift exemption to fully escape your estate for Inheritance Tax purposes, you need to survive more than seven years from the point the gift is made. If the donor of the gift fails to survive seven years, the value of the gift will use up part of their nil rate band, which is the first £325,000 that you can give away on death before Inheritance Tax becomes payable. Where any amount of the gift exceeds the nil rate band, Inheritance Tax is charged on the surplus and is payable by the donee (i.e. the person receiving the gift). There is, however, taper relief that reduces the amount of Inheritance Tax charged, so long as the individual has lived more than 3 years after making the gift.

Making regular gifts

Another way of making a gift without tax considerations is to make regular gifts out of surplus income. This is a confusing rule, and great care is needed if relying on this rule when making gifts. Firstly, the gift can only be made out of income that is truly surplus to your requirements, after all regular spending is taken into account. Secondly, the gifts need to be regular in nature, that is to say that they follow a pattern. For example, if you have truly surplus income over expenditure of £10,000 per annum, and pay this amount each year to your child or grandchild to help pay for school fees, this is likely to be accepted as a regular gift out of surplus income.

The gifts out of surplus income rule cannot be used if the person making the gift reduces their standard of living to make the gift, or uses capital for this purpose. A useful tip for those relying on this rule is to make a careful note of income received and outgoings in a tax year, to help demonstrate that the gifts have been made from income that is truly surplus to requirements.

Avoiding common pitfalls – the importance of advice

Before planning any gifting, it is important to take stock of your own personal financial position. It is understandable that many would not hesitate to offer a gift to help family members, or look to take action to reduce a potential Inheritance Tax charge on their estate; however, many people underestimate potential costs that can arise, particularly in later life, when care fees or private medical expenses may need to be met. By taking holistic financial planning advice, the impact of gifting can properly be assessed to see whether any material damage to your own financial position will result after making the gift.

Deciding which assets to gift can also lead to adverse tax consequences. Where some will have available cash to make a straightforward payment, others may need to sell down assets, be they property or investments. These actions can create an unintended tax consequence for the one making the gift.

It is also important to seek holistic advice, as assets such as the value of personal pensions may not aggregate with other estate assets when assessed for Inheritance Tax. This may cast a different perspective on any planning required.

Finally, there are a number of tools available at our disposal that can assist in estate planning. One such example is the ability to arrange a limited life assurance policy that can be used to pay the Inheritance Tax if the individual making a larger gift doesn’t survive the requisite seven years after making the gift.

Speak to one of our experienced advisers who will be pleased to provide advice on the options and assess the impact of any actions taken.