Death to inheritance tax (reliefs)
8th November 2024
Posted in Articles, IHT, Inheritance Tax, Trusts and Estates by Forbes Dawson
With more drama than the TV show Succession in last week’s Budget, the introduction of a reduction to Business Property Relief (‘BPR’) (and before anybody says “It’s Business Relief!” yes we know, but HMRC referred to it as BPR in its budget statement and so we are sticking with that) and Agricultural Property Relief (‘APR’) put the viability of real-life family business successions in doubt.
The current 100% relief (available to 5 April 2026) allows trading and farming businesses to be transferred free of inheritance tax (‘IHT’) on death to the owner’s descendants, allowing the businesses to continue unscathed and unencumbered with IHT-related debt. The reduction in the rate of relief to 50%, after a £1m allowance attracting 100% relief means that a significant number of estates will now suffer IHT on death. This begs the question of how the tax can be paid if the value is tied up in the business and may not be comprised of liquid assets.
Example
Take Mr Scrumpy (a divorcee) who has been a farmer for years but has diversified part of his farming business into making artisan scrumpy cider. The value of his farmland stands at £2m and the cider company is worth £5m. His only other assets are the farmhouse which is worth £800,000 and a buy-to-let cottage which is worth £325,000. Based on current IHT rules, no IHT liability will arise on his death as the farmhouse, farmland and trading company will attract 100% APR and BPR respectively and the cottage will be covered by his nil rate band. This would allow his son and daughter to inherit the businesses without needing to raise finance or sell them. In addition, the value of the assets would be uplifted to market value at the date of death, wiping put any historical capital gains.
On Mr Scrumpy’s death after 5 April 2026, the IHT liability increases to £1.36m! (40% on total assets of £8.125m less £325,000 nil rate band less £1m 100% allowance less £3.4m 50% allowance). As the sale of the farmhouse is unlikely to be practical when the farm activities are continuing, the only option will be to sell the buy-to-let property to fund part of the tax payment, with the remainder of just over £1m left outstanding on the 10-yearly instalment option. Hopefully, the instalment option will remain interest-free for such assets, as late payment interest of 9% would be unpalatable and unaffordable to the children. This means around £100,000 of IHT will be payable every year for 10 years. This is a massive contrast to the current position.
If this IHT is to be funded from the scrumpy business, then up to £219,840 of pre-tax profits will be required just to fund the IHT. I say this because £219,840 of pre-tax profits would be reduced by £54,960 of corporation tax to £164,880 of post-tax profits. This £164,880 of post-tax profits could then be reduced by £64,880 of additional rate income tax (at 39.35%) to get to £100,000 of IHT which is owed to HMRC.
Forbes Dawson view
This increase in tax rate is likely to prompt many business owners to consider making lifetime gifts earlier than previously planned. However, the obvious downside of this kind of planning is that the uplift to market value on death for capital gains tax purposes will not be available to those assets given away, therefore the attractive combination of no IHT and no capital gains tax on inherited assets has disappeared. Also, it is not always practical to give assets away many years before death. Mr Scrumpy will want to retain shares to receive dividends, and he may not want to relinquish control of his businesses. He could opt to give some shares away into trust before 5 April 2026 to retain that control. The optimum position would then be for Mr Scrumpy to survive seven years from the gift (otherwise the failed gift would be chargeable at the new rates) or die before 5 April 2026! It’s enough to drive you to scrumpy…
