Changes to Inheritance Tax Rules

Update clarifying a few points regarding the changes to Inheritance Tax rules notified in the budget on 30^th October 2024

• The new £1 million allowance for business/agricultural assets is per estate so there is potentially £2 million (2 x £1 million per individual) available where assets are held jointly by a couple. The allowance is not transferable, so it is important to utilise the relief on first death i.e. by leaving a share of the farm to children or into discretionary trust and not to your spouse. If spouse’s leave all farming assets to each other they will lose £1 million in relief. It may be possible for the surviving spouse to benefit from the asset still by being a beneficiary of a discretionary trust.
• Planning point – if a sole trader and married think about bringing spouse in as a partner with 50% of property and trading assets being transferred – to make use of a second exemption of £1m.
• An important point not to miss is the fact that the drop to 50% also applies to trading assets -stock and machinery etc as well as property. Where individuals who trade on their own or in partnership die then valuations will be needed. Something that hasn’t been considered fully since 1984!
• Where assets are held outside of a partnership or a company which the transferor controls the rate of Business Property Relief will continue to be 50%.
• Where assets were gifted before 30th October 2024 the existing 100% relief will apply if the donor dies within 7 years, provided the assets are still used by the recipient of the gift for business purposes.
• If assets are gifted on or after 30th October 2024 and the donor dies before 6th April 2026 the existing 100% relief will apply, provided the assets are still used by the recipient of the gift for business purposes.
• If assets are gifted on or after 30^th October 2024 and the donor dies on or after 6^th April 2026 but within 7 years of the gift, the new rules will apply with 50% relief on any value of agricultural/business assets in excess of £1 million.
• For gifts on or after 30th October 2024 the 7 year rule still applies whereby the value of any gift will fall out of the estate if the donor survives 7 years from the gift.
• Where a donor does not survive 7 years from gifting assets and the new rules apply if the value left chargeable exceeds £325,000, taper relief can reduce the inheritance tax that would be payable on the gift on a sliding scale. The percentage of tax charged is reduced by 20% if the donor survives between 3 and 4 years from the gift, increasing to an 80% reduction if they survive between 6 and 7 years.
• With the nil rate band of £325,000 and a residence nil rate band of £175,000 for each individual, the new rules are unlikely to cause a significant inheritance tax problem for any couples with a combined estate worth £4 million or less where they do not have any non-agricultural/business assets, assets are held jointly and they leave their share of the assets to children or a discretionary trust on first death.
• Life cover can be looked at to provide for any inheritance tax exposure. For those gifting part or all of their assets, level term cover can cover the 7 years from the date of gift before the value drops out of the estate, or with a sliding scale. Whole of life cover can be looked at for those retaining assets.
• Where IHT is payable in respect of business/agricultural assets this can generally be paid in instalments over 10 years interest free.
• The new measures will also impact trusts, with a £1 million allowance now shared across related trusts established after 30th October 2024. This change necessitates careful planning for the use of trusts, as well as for funding 10-year anniversary and exit charges starting in April 2026. For assets exceeding £1 million, where APR and BPR reliefs are limited to 50%, an effective 3% charge will apply.
• The potential for increased future inheritance tax liabilities may reduce the bank’s appetite to lend, reinforcing the need for proactive estate and business planning to reduce and manage these potential impacts effectively.
• As an aside. the Budget confirmed that land managed under environmental agreements will qualify for APR from 6th April 2025, although this is limited by the £1 million cap.
• Another factor to consider is that the government will make unused pension funds liable to inheritance tax from 6th April 2027. This is the subject of consultation as to how it will work in practice.
• With the possibility of further rule changes to come, we recommend considering action now, if not already done, to provide you with greater certainty and make the most of current estate planning opportunities.

Please note that whilst the proposed tax changes from the 30th October 2024 budget are subject to parliamentary approval in our opinion they are unlikely to be significantly amended before becoming law. We are also anticipating further more minor changes to the detailed rules in capital taxes over the next few months.

You can download this budget summary in a PDF format by clicking here.

Please note: The above resource is provided for general information only. No responsibility can be accepted by Ward and Co Accountants for any use made of the information presented, whether acting or refraining from action as a result of the material published. No action should be taken without consulting a professional adviser.