Rushed decisions on IHT liabilities could prove costly, writes MARK PRYCE
It used to be the case that entrepreneurs and business owners could transfer over their longstanding commercial legacies to the next generation without the fear of a huge cash tax bill on their death. Changes announced by the Chancellor have not only caused widespread anxiety, there is the added risk that decisions may be rushed and which are not in the best interests of the business owners or their families.
New rules are being introduced for Business Property Relief (BPR) and Inheritance Tax (IHT) next April and the need to get the best advice is paramount.
Currently, Agricultural Property Relief allows farmland and related buildings to qualify for 100% relief from IHT but from 6 April 2026 the relief will be capped at £1 million per estate. Any excess will be taxed at 20% (half the standard IHT rate).
Similarly, Business Property Relief, which offers up to 100% relief on qualifying business assets, will change with the first £1 million of business assets being fully exempt, and any excess taxed at 20% (half the standard IHT rate).
The drastic personal and commercial impacts of losing a key leader and important family member are already hard enough for businesses to bear. Add the looming tax changes on top results in a great deal of extra worry when the time comes.
A practical example would be a company owned by a brother and a sister in their fifties making £2 million profit per year. The bulk of the cash is reinvested annually to improve efficiency and competitiveness. Their business is worth £15m on paper, including these invested reserves, not drawn down by the owners.
One of them tragically dies in mid-May 2025. The shares pass to the other in their will and as such, no tax arises. The business is left shocked by the awful event, but trades on.
Take the same circumstances from April 2026. The value of the shares on passing is £7.5m, there is a £1m allowance and the rest gets taxed at 20% for IHT with the IHT bill at £1.3m. The problem now is – who funds the tax bill?
Owners aware of this risk are now looking at their options to protect their legacy businesses from failing when they are no longer here. Many are taking out life insurance to cover the risk of a cash funding crisis arising from the obligation to pay HMRC the IHT on death.
These premiums are not cheap and in addition to NIC increases they are adding to the cost of business crisis. In an ageing population this risk to business is widespread. Structured correctly, it may be possible to achieve some tax relief on these payments in certain circumstances which may offset this financial cost.
More sophisticated planning involves, for example, the creation of cash-funded pension pots by businesses so monies are set aside to draw upon to meet the tax bill in the event of death. Remembering though that because pension funds will also be subject to IHT on death from 6 April 2027, this will also need to be factored into the planning.
This has led some owners, instead of (or as well as) paying ongoing insurance premiums, seeking to reduce the value of their estate by establishing annuities streams to fund future IHT bills. Whilst some of these strategies do tend to attract ongoing income tax costs, ultimately the overall tax rate could be significantly lower, but the main theme here is that sufficient post-tax cash gets tucked away in reserve for the sad day the ultimate IHT bill becomes payable.
The new BPR and IHT rules are complicated, expensive and causing widespread fear and worry for business owners. Given the low thresholds, relatively small businesses and their owners will be required to pay much higher IHT. These changes are just ten months away and we would encourage anyone concerned about their impact to seek advice and plan ahead.
Mark Pryce is head of business tax at Azets in Scotland
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