By Chris Moir, associate director and head of personal tax at RMT Accountants & Business Advisors
In her recent Budget, Chancellor Rachel Reeves announced significant changes to the availability of Business Property Relief and Agricultural Property Relief for Inheritance Tax (IHT) purposes which are likely to have a long-term financial impact for those that don’t plan properly in response.
In summary, the changes 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%, which means that, 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 who have structured their affairs to manage the value that they have created within the business, and they will now need to review and adapt them to ensure they have robust plans in place to mitigate the impact of these forthcoming changes.
Government consultations regarding all of the proposed changes to IHT are still ongoing, with a separate consultation underway for the general announcements on business property relief / agricultural property relief. Further details are expected to be released by the government in the coming weeks.
Understanding the impact on you
However things turn out, before deciding on what actions you might take, it’s essential that you take informed, professional advice, so that you 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.
Nevertheless, it would make sense to review any family Wills, as you should be doing regularly anyway, and to consider the cash flow of your executor, 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, the ability to do so in instalments will continue to be available.
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, but 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, and it does allow 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, which enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax 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 at RMT Accountants & Business Advisors via advice@r-m-t.co.uk or on 0191 256 9500.