The ability to pass on a family business to the next generation without worrying about inheritance tax (IHT) will be coming to an end on 6th April 2026.
From this date, business property relief (BPR) and agricultural property relief (APR), which provide taxpayers with 100% inheritance rax relief on qualifying assets, will be capped at £1 million.
After the first £1m of relief per taxpayer, the level of IHT relief available will be halved, meaning IHT will be payable at half of the 40% rate on the excess. This means that if a business or a share of a business (partnership, limited company etc) has a value of over £1 million, the IHT payable on the excess over £1m will be charged at 20%. As the current main rate of IHT is 40% for all other assets, this still represents a substantial saving, but it is a very significant change for those affected.
Many family businesses are valued at well over £1 million, so there is a risk that certain businesses will not be able to continue to trade because of the requirement to find cash to pay IHT.
What are the key challenges of the new BPR rules?
Valuations. One of the first challenges the executors of owners of family businesses will face is how to obtain a business valuation, or a valuation of the deceased’s share of a business at the time of death. This has not previously been an issue because 100% BPR automatically applied. Once the new rules come into operation, obtaining a valuation of a business may be a lengthy process, and will result in additional costs for the executors.
Paying the tax due. Another bigger issue is how the executors will fund the IHT bill. IHT is usually due by the end of the sixth month following a death. However, IHT attributable to the value of assets which qualify for BPR can be settled in 10 annual, interest free instalments. This instalment option doesn’t of course lessen the burden on the executors to fund the tax, but it will provide time.
Tax planning for a new BPR landscape
These changes to the BPR rules make succession and IHT planning even more important to undertake – and as early as possible. Discussions could consider the following tax planning strategies:
Utilise the £1 million allowance: Each individual stakeholder in the business is entitled to a lifetime BPR allowance of £1 million. Spouses and civil partners should consider ensuring they each own a share in a family business up to this value where applicable.
Consider lifetime gifting: Giving assets remains a useful strategy to avoid IHT and should be explored if it is a possibility and can utilise the seven year rule to fall outside an estate permanently. Whilst it means assets are not inherited at probate value, it does lock in the current value of the asset for IHT purposes, meaning that future growth does not attract IHT in the hands of the donor after seven years has expired. This is especially useful if you expect your business valuation to increase.
Consider a trust. If outright gifts of business assets are problematic, a gift onto trust could be worth exploring.
Our advice to all business owners is to start thinking very carefully about succession planning and how they will mitigate IHT now that the BPR threshold has been reduced.
If you would like specialist advice on inheritance tax planning, contact partners@rjp.co.uk.