Business owners have a small window for inheritance tax planning
Annie Pearson
by Annie Pearson
The British government’s Autumn Budget 2024 saw the announcement of the biggest shake up of inheritance tax (IHT) reliefs in almost 10 years, and business owners don’t have long to prepare.
Since 1992, Agricultural and Business Reliefs (APR and BPR) have exempted up to 100% of the value of qualifying assets from IHT on the death of the owner, allowing farms and businesses to be passed on to future generations with minimal financial disruption. Beginning in April 2026 these reliefs will be heavily restricted, with 100% relief only available on the first GBP 1 million of qualifying assets. Any value above that threshold will be eligible for 50% relief, leaving half of the excess value exposed to IHT at a flat rate of 40%.
Business owners who expected the tax due on their deaths to be minimal are now considering how their families will fund these newly anticipated large bills (see Jack’s illustration on the following page).
Jack owns a manufacturing business, valued at GBP 4.5 million. His other assets are a family home (GBP 300,000) and some individual savings accounts (ISAs) (GBP 60,000). Jack’s daughter works in the business and will take it over on Jack’s death. Everything else will be left to Jack’s wife.
If Jack dies before 05 April 2026 no inheritance tax will be due because Business Relief covers the business passing to his daughter and spousal exemption will cover the rest of the assets passing to his wife.
If Jack dies after 05 April 2026, his estate will owe inheritance tax of GBP 570,000.
Business
£4,500,000
Other
360,000
Total Estate
4,860,000
Spousal Exemption
100% Business Relief
1,000,000
50% Business Relief
1,750,000
-3,110,000
Taxable Estate
£1,750,000
Nil Rate Band
(£325,000 @ 0%)
£0.00
Inheritance Tax
(£1,425,000 @ 40%)
£570,000
Many of those affected are already putting in place strategies to try to mitigate the impact, but which options are suitable depends wholly on the nature of the business, its cashflow and the owner’s financial and family structure. There is no “one size fits all” solution. Planning is difficult because draft legislation hasn’t been produced yet, so the detailed application of the reformed relief is not known. Draft legislation is expected later this year but won’t leave much time for businesses to plan before the changes “go live” in April 2026.
Some of the most common strategies being discussed are ensuring that wills are structured to make the most of the GBP 1 million allowance, and passing business assets to the next generation earlier than expected in the hope of surviving for 7 years. Gifts to individuals are only subject to IHT if the donor dies within 7 years of making the gift, so for those in good health this can be a practical option. Others are exploring how insurance might help to pay the tax bill rather than try to mitigate it.
Wright, Johnston & Mackenzie LLP is an independent Scottish Law firm offering the full range of corporate, dispute resolution, and private client services. They are GGI's sole Scottish member.
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Annie has been with Wright, Johnston & Mackenzie since 2013 and has over 15 years’ experience dealing with Private Client work, specialising in tax and estate planning. She is a qualified Chartered Tax Advisor and member of the Chartered Institute of Taxation. She frequently presents on the subject of trusts. Contact Annie.
