Navigating the new inheritance tax landscape: APR and BPR Reforms

Plan ahead to reduce the impact of inheritance tax proposals, says Bruce Masson, of Larking Gowen

On 30 October 2024, Chancellor Rachel Reeves announced that Agricultural Property Relief (APR) and Business Property Relief (BPR) will be reformed with effect from 6 April 2026.

Under the present rules for inheritance tax, APR and BPR apply at a rate of either 50% or 100% but with careful planning, many businesses will have been able to claim unlimited relief at 100%. This is all set to change quite drastically with relief at 100% only available on the first £1m (per taxpayer) of agricultural and business property with amounts in excess of £1m, and eligible for relief, subject to an effective rate of 20% of inheritance tax.

In addition to the above proposals, the thresholds for the nil rate band (currently £325,000) and the residential nil rate band (currently £175,000) have been frozen until 2030. An individual therefore has up to £1.5m of reliefs available but the residential nil rate band is tapered by £1 for every £2 if the value of the estate exceeds £2m (before reliefs and exemptions).

This means once an individual’s estate exceeds £2.325m, there is no residential nil rate band available. It is likely that many individuals’ estates will not have the residential nil rate band available.

Married allowance

The government has stated that a married couple could have up to £3m of relief available but this would require a very precise set of circumstances that is practically difficult to achieve. The starting point for a married couple will be £2.65m, in other words, two £1m allowances and two nil rate bands. The £1m allowance, unlike the nil rate bands, is not transferable.

The government announced a technical consultation for trusts to be undertaken from January 2025. The current proposal is where settlors have created more than one trust before 30 October 2024, each trust will be able to benefit from the £1m allowance for relief at 100% (if the trust property is a qualifying asset) with effect from 6 April 2026. If the trust was created after 30 October 2024, the £1m allowance will be shared amongst the settlors.

Lifetime Transfers

Additional guidance was provided on lifetime transfers, for which holdover relief for capital gains tax purposes is still available, made on or after 30 October 2024 if the transferor dies after 5 April 2026.

The first £1m will be eligible for relief at 100% but only 50% relief on amounts in excess of £1m if the transferor does not survive seven years.

It is assumed that taper relief would still be available if the transferor survives the gift by at least three years but this has not been confirmed. Gifts made prior to 30 October 2024 will be subject to the current rules.

The £1m allowance will include the individual’s share of plant and machinery and working capital of the business – cash, growing crops, livestock and debtors less any liabilities such as bank loans/overdrafts – which will be subject to BPR. For most businesses, this could be a substantial figure even before the value of the land and buildings is taken into consideration.

Recommendations

The fine details of the proposals will hopefully be released soon so planning ahead on the proposals is challenging but discussions with professional advisors are strongly recommended.

Businesses will more than likely have to restructure and this will almost certainly include a review of the partnership agreements and wills for unincorporated businesses and shareholders’ agreements and memorandum and articles of association for companies.

When assets are gifted, the transferor needs to be aware of the ‘reservation of benefit’ rules. This is if the transferor continues to derive a benefit from the asset they have transferred without a full consideration being paid, the gifted asset could remain in the transferor’s estate for inheritance tax purposes and therefore the gift fails.

Visit larking-gowen.co.uk and discover how our experts can support your tax planning and help to guide you through these changes.

Options to consider:

Options that each business will have to consider include:

• The gifting of assets to a younger generation. The transferor
     would need to survive the seven years to be completely free of       inheritance tax;

• The introduction of spouses or younger generations into        businesses, if they are not involved in the businesses already;

•  The use of life insurance to cover any inheritance tax liability that may arise. This can be effective for transferors who are younger and healthy but may be prohibitively expensive for anyone, say, over 70 years of age;

• Splitting ownership of assets where possible may devalue the assets within businesses to reduce the impact of inheritance tax