The Labour government is expected to make some significant changes to inheritance tax (IHT) reliefs in the forthcoming Autumn 2024 Budget. This could have significant implications for both business owners and private individuals with substantial estates.
What is potentially being changed?
Business and Agricultural Relief capped
Currently some business owners and taxpayers with agricultural assets can get 100% tax inheritance relief, by claiming business property relief (BPR) or agricultural property relief (APR) if they meet certain qualifying criteria. Now, Labour is reportedly considering capping the amount of inheritance tax relief available for business and agricultural assets at £500,000 per person. If this relief is capped, IHT would be payable at the normal rate of 40% on values above £500,000 on death. If an asset is owned jointly, for example by spouses, each owner would receive a £500,000 allowance, which could be pooled to make £1 million.
Potentially removing BPR altogether?
Other news reports are suggesting some of these inheritance tax reliefs could be entirely abolished, in which case there would be no inheritance tax relief available for business or agricultural assets on death. This would have significant consequences for family-owned businesses or farms, so it is likely some provisions will be put in place to enable a family business to implement a genuine succession plan, without incurring adverse tax implications. SME businesses are major sources of employment in the UK; removing or capping these reliefs altogether would have a negative impact on SMEs on the death of an owner, potentially forcing the sale or unnecessary winding up of family-run businesses, just to pay IHT liabilities.
What steps could taxpayers take?
These changes are just suggestions at the moment, and we do not know exactly what, if anything, will be introduced in the 2024 Autumn Budget. However, it may be worth considering potential strategies to mitigate the possible IHT impact of changes, for example, gifting shares into trusts, or transferring ownership to family members. These options could be implemented as a chargeable lifetime transfer or a potentially exempt transfer (PET), but it’s important to appreciate that this has implications too. If the donor dies within seven years of making a gift that is currently covered by BPR, IHT will be payable if BPR is no longer available at the time of death. In the case of trusts, these will also incur additional tax liabilities and ongoing administration costs, which may reduce their tax effectiveness.
It is always important to property weigh up the pros and cons of any tax planning strategies and it is unwise to make financial decisions purely on the basis of the tax implications. In addition, wider tax anti-avoidance provisions, such as the general anti-abuse rule (GAAR), exist already and this legislation needs to be considered before taking any tax planning steps that could otherwise be seen as abusive.
Major taxes to remain the same
If the existing IHT reliefs are removed, it will enable the government to increase its total tax receipts. This is part of a broader economic strategy to avoid increasing national insurance contributions; the basic, higher, or additional rates of income tax; VAT or the main rate of corporation tax. Keeping these major tax rates the same was a key election promise.
Previous Budget protocol has been for proposed changes to be launched initially as a proposal, subject to consultation. The government would then offer a timeframe for making the tax changes, allowing for tax planning once a definitive plan has been unveiled. It remains to be seen whether such protocol will continue to be followed.
We will be monitoring developments to help our clients stay informed about potential changes and writing updates as information is available. In the meantime, you may wish to consider seeking professional advice to understand and plan for the implications of any new IHT policies that could be introduced in the Autumn 2024 Budget.
Contact us if you would like to discuss inheritance tax planning by emailing partners@rjp.co.uk.