You may well have seen the farmer protests following the Autumn 2024 Budget, which announced significant changes to long-standing Inheritance Tax reliefs – Business Property Relief (BPR) and Agricultural Property Relief (APR). Farmers were quite rightly aggrieved over these changes but here we want to focus on the wider impact on small and medium-sized business owners up and down the country.
What is changing?
Previously, both BPR and APR provided a 100%, uncapped relief on qualifying business and agricultural assets, ensuring that these assets could pass to beneficiaries without an Inheritance Tax charge. This was important as often the value is “on paper” only and very illiquid, meaning it is difficult to realise such value to meet any IHT liability arising. From April 2026, however, BPR and APR will be restricted as follows:
- A £1 million cap applies to the total combined value of assets eligible for 100% relief. Anything above that will only qualify for 50% relief, effectively leading to a 20% IHT rate on the excess.
- Additionally, shares in companies listed on markets like AIM (treated as “not listed”) will only attract 50% BPR in all cases.
Worked Example Let’s say your business is worth £3 million and qualifies in full for BPR. Let’s also assume that other reliefs (e.g. the nil rate band) have already been utilised on other assets, such as your main residence. Previously, BPR would have applied to the entire value of your business, exempting it entirely from IHT. Going forwards, however, the following will apply:
- The first £1 million attracts 100% relief meaning no IHT is due.
- The remaining £2 million would attract only 50% relief, therefore meaning £1 million becomes taxable at 40%
- This leave an IHT liability of £400,000.
What should I do?
Here are a number of options to be considering:
1. Review BPR/APR Eligibility Whilst BPR and APR have been restricted significantly, they are still very valuable reliefs and so you should firstly clarify eligibility. If the trading test is not met, could assets or corporate structures be restructured to make the position more favourable?
2. Review IHT Exposure As part of this, a review of your IHT exposure generally is worthwhile in light of the changes. If the worst was to happen, could your estate fund the IHT liability arising? Will assets need to be sold? Note that the IHT liability is due within 6 months of death so if illiquid assets are held, this can be particularly burdensome for estates to meet. It is possible in certain circumstances to spread the IHT bill across a number of years, but HMRC would charge interest which can accumulate into a significant sum.
3. Review Wills Current wills and letters of wishes should be reviewed to ensure these make use of reliefs and exemptions. It is common, for example, for spouses to have mirrored wills where all assets pass to one another. It is important to note, however, that the £1m limit for BPR and APR is not transferrable so will be lost if all assets pass to a spouse. It is likely that we will see more Will Trusts being established at death to make use of the deceased’s £1m limit.
4. Make Lifetime Gifts Whilst these changes are significant, it may perhaps encourage owners to consider succession planning earlier. Making lifetime gifts can ensure the donor can facilitate a smooth handover of the business and step away more gradually. Gifts of assets qualifying for BPR would ordinarily qualify for gift (holdover) relief, on which there is no limit, so assets can be given to the next generation during one’s lifetime. The gift would, however, be a Potentially Exempt Transfer (PET) subject to the 7-year survivorship rule.
5. Review Trust Structures Trusts will equally be subject to the £1m limit to BPR or APR which may not cover all assets, thus creating ‘dry’ tax charges for 10-year anniversary and exit charges. It will be important to consider when such charges will arise and, again, how these will be funded.
How can we help?
We can quantify the impact of the recently announced changes as part of a holistic review of your IHT exposure and suggest options to mitigate the liability arising. We can determine whether any planning should be implemented before April 2026 We can also work closely with Independent Financial Advisors and Solicitors to ensure all parties are fully informed and comfortable on any planning and that it is appropriate for the entire family, reducing the stress and anxiety caused when a loved one passes and leaves a significant tax bill. If you would like a free consultation to discuss your IHT exposure and impact of BPR/APR, please contact Matthew Spencer at matthew.spencer@imperiumfs.com or on +44 (0)1256 678190.