A recent report from Irwin Mitchell Solicitors highlights the rise in Inheritance Tax (IHT) liabilities, with a prediction of a 50% increase in estates affected by 2030. The increase will be for several reasons, including some changes (covered below), but it shows that IHT is no longer just a concern for wealthy families, it impacts middle-income households. By 2027, the Treasury is expected to collect £9bn annually from IHT, up from £5.5bn in 2021/22.
Another reason for the rise in the IHT receipts, is enquiries have significantly increased by 33%, in just one year, rising from 3,028 to 4,171. The increase is part of the Government's efforts to combat tax avoidance and improve fiscal responsibility. We have reported previously on the rise in enquiries in all areas, which is due to HMRC having better data access and information, with its Connect IT software.
In the recent spending review, The Chancellor earmarked an additional £500m for HMRC to force 90% of interactions with tax authority online only by 2030 with inheritance tax being pushed as a priority.
Last year’s Autumn Budget announced the end of the uncapped 100% IHT relief not just for Agricultural Property but also for Business Property Relief (BPR). This relief plays a vital role helping the UK’s 4.8 million family businesses pass from generation to generation without the business being damaged or broken up to pay IHT. Today, if you die while owning shares in your trading business, have an interest in a trading partnership, or a sole trader business, the value of the business is usually exempt from IHT. From April 2026, based on what is known, the 100% relief is limited to the first £1 million. Any excess will only get 50% relief: an effective IHT charge of 20%.
The farmers who have the same issue with their IHT relief, Agricultural Property Relief, are taking to the streets in protest, being able to galvanise their supporters, and make a lot of noise, but not yet seen any impact. The changes are under consultation, which closed for public input in April.
What we believe will be put in place:
- There will be no change to the £1m allowance announced for BPR and agricultural property, with the balance being taxed at 20%. The consultation is more to do with technical points around interaction and managing costs.
- When applying the £1m allowance on a person’s death, any potentially exempt transfers (PETs) and chargeable lifetime transfers in the previous seven years are also taken into account, to establish what of the lifetime allowance is left.
- Similarly, chargeable lifetime transfers are subject to the £1m allowance and also takes into account previous chargeable transfers in the last seven years.
- PETs and chargeable lifetime transfers made before 30 October 2024 (Budget Day) are subject to the rules applicable at the time they were made and therefore there is no limit on the amount of 100% business or agricultural property relief that is available, nor will they be treated as using up any of the £1m allowance. However, if a lifetime transfer of qualifying business or agricultural property is made on or after 30 October 2024 and before 6 April 2026 (the transitional period) and the donor dies within seven years, it will be subject to the £1m limit (and the allowance available for subsequent transfers will be reduced) unless the death is before 6 April 2026.
- PETs and chargeable lifetime transfers made before 30 October 2024 (Budget Day) are subject to the rules applicable at the time they were made and therefore there is no limit on the amount of 100% business or agricultural property relief that is available, nor will they be treated as using up any of the £1m allowance. However, if a lifetime transfer of qualifying business or agricultural property is made on or after 30 October 2024 and before 6 April 2026 (the transitional period) and the donor dies within seven years, it will be subject to the £1m limit (and the allowance available for subsequent transfers will be reduced) unless the death is before 6 April 2026.
- There will be a change to the rules for calculation of exit charges that take place after the first 10-year anniversary. Currently tax is calculated by using the rate that applied at the previous anniversary, adjusted for the length of time that has elapsed since the anniversary (and, where necessary, for property added subsequently). The proposed change will only affect property leaving the trust that is not covered by 100% business or agricultural relief, but will increase the rate of tax that applies to such property by recalculating the previous 10-year charge rate disregarding business or agricultural property relief.
The consultation document also confirms that, from 6 April 2026, all business or agricultural property that is eligible for relief at either 100% or 50% will be eligible for payment by interest-free instalments over 10 years.
What you can consider to mitigate your tax risks:
- If not done so already, and provided you want to, if your spouse is not a shareholder, consider making your spouse a shareholder; and under the terms of your Wills, making sure you do not leave your shares to each other, but to your children.
- Gifting shares to the next generation now while 100% relief is available, but the consultation does have some guidance in this area.
- If the donor (person making the gift) dies within seven years of the transfer, the new owner could be left with an unexpected tax bill. For family businesses, handing over shares too soon also risks unsettling governance structures. In particular, businesses should consider how the company currently functions at board level and among shareholders, and how the company should function going forward.
- If there is likely to be a shift in the governance of the company, careful thought is needed on how to achieve that and what should happen to the company’s constitutional documents. Additionally, restrictions on transfers or specific consent rights could complicate the process if attempted without shareholders’ consensus. Without proper planning, a rushed handover might undermine the company’s long-term success.
- Business owners should start reviewing their options now discussing and testing option, already have some preliminary valuations and modelling the impact of the proposed changes will be crucial in preparing for the new landscape.
- With the increase in enquiries, HMRC is expected to scrutinise surplus cash and investments held within trading companies, assessing whether they are needed for operations. Excess cash and investments not demonstrably earmarked for business use may cause the company to cease to qualify for business property relief, further increasing the potential inheritance tax liability. Keeping clear records to justify investments and cash balances is essential.
- Liquidity planning will be key. If dividends or share buybacks are required to fund inheritance tax liabilities, businesses must ensure that they have sufficient reserves, and the tax implications of these strategies must be carefully managed (where the shareholder may pay income tax on any dividend before then paying the inheritance tax).
- Where the company shareholders are not from the same family, the Directors have a duty to balance the needs of shareholders as well as the deceased, making it essential to address these issues well in advance. External directors, in particular, will be conscious of the need to ensure that decisions are made with due diligence and proper corporate governance. The board as a whole will be conscious of the need to ensure that decisions are made with due diligence and proper corporate governance.
The proposed changes will also have an impact on how businesses approach investment decisions. If trusts and individuals holding business property relief-qualifying assets face (periodic) inheritance tax charges, investment strategies may need to be adjusted to ensure that enough liquidity is available to meet these liabilities when they arise. This could mean a shift in how businesses balance reinvestment in growth with the need to retain sufficient cash reserves without prejudicing the business property relief.
Another expected change, timetable for April 2027, is the taxation of pensions. Currently, private pension funds are IHT exempt, however, this is under review, the consultation closed at the end of March. We are now awaiting the results of the consultation, to understand what the Government are looking at.
The amendments to BPR will fundamentally change how business owners’ approach IHT, succession and corporate strategy. While the rules will not come into force until April 2026, acting now will be critical in mitigating risks and ensuring businesses remain financially secure for the next generation.
