Techzone

The IHT liability of many business owners is set to increase from April 2026 with the introduction of a £1M cap on the amount of business relief available at 100%. However, a recent HMRC consultation has revealed that business owners may have an opportunity to benefit from more than one £1M allowance.

The consultation confirms that the £1M limit on assets qualifying for 100% business property relief (BPR) and agricultural property relief (APR) will refresh every seven years. This may incentivise more business owners to consider lifetime gifting of business assets as part of a strategy of rolling seven year gifting to mitigate IHT.

This is better news for those affected as it was originally thought that the limit on 100% relief would be a lifetime limit. This will provide more opportunities for lifetime gifting to increase the amount of relief available at the full 100% rate, although this may not be the right approach for everyone. The business owner’s personal IHT concerns will need to be considered in conjunction with the overall needs of the business.

There's no draft legislation yet, and there is still time for changes. This should be borne in mind for any planning undertaken in the meantime, and there are transitional provisions preventing individuals and trusts benefiting fully under the old rules.

So how might the proposals impact IHT planning for business owners in the future?

Take no action

Under current rules, business owners can keep their qualifying business assets until death and pay no IHT. This will still be the case for deaths before 6 April 2026. For deaths after this date, only the first £1M of qualifying assets will be free from IHT, with any assets over a £1M receiving 50% relief - i.e., tax at 20%. The ordinary nil rate band will also be available of course, but this should be used first against other non-qualifying assets taxable at the full 40% before use against qualifying business assets.

Doing nothing could therefore result in more IHT, but this may still be attractive:

• Control of the business is retained
• Income received from the business can continue, e.g. dividends
• Business assets and shares held at death will receive a CGT market uplift

It should be noted that the £1M allowance will not be transferable between spouses or civil partners. If a business owner leaves all their business to a spouse, the spouse exemption will apply and there will be no IHT, but the unused £1M allowance will be lost. On the subsequent death of the spouse, there will only be one allowance of £1M and not two. It may therefore be more tax efficient to consider leaving non-business assets to the spouse and pass the business assets qualifying for relief to the children.  

Where there is tax to pay on assets only relievable at 50%, these can be paid in equal interest-free instalments over 10 years. This will potentially allow businesses to survive the death of an owner which, after all, was the original reason behind BPR and APR.

Should individuals decide to retain business assets then their IHT bill may be increased. To counter this, business owners may consider more conventional gifts from non-business assets and savings, either by gifting directly as PETs, or via discretionary trusts if an element of control is preferred.

Alternatively, whole of life policies in trust could be used to cover the additional IHT due. This option may be particularly desirable if the additional IHT threatens the business as a going concern.

Make outright gifts during lifetime

A business owner could consider making gifts of qualifying business assets - including shares in the company - to, say, the children as part of succession planning. This type of gift would be a PET and won’t use up any of the £1M allowance, provided the donor survives the gift by seven years.

Failed PETs made between 30 October 2024 and 6 April 2026 will use the £1M allowance if the date of death is on or after 6 April 2026. Failed PETs with a value that exceeds £1M will get 50% relief and would be further eligible for taper relief if the gift was made more than three years before the date of death.

The treatment of any failed PETs where the gift was made before 30 October 2024 remains unchanged - there will be no IHT provided that the assets or shares still qualify and the recipient of the gift still holds them.

So, there's clearly an IHT benefit to making outright gifts of qualifying business assets if they are survived by seven years. And new gifts could be made every seven years. If a PET fails, the IHT position will be no worse than if no gifts had been made at all - it may even be an advantage if taper relief applies. But there are other implications:

• Gifts of business assets are disposals for CGT, but the gain can be held over so that no immediate tax is payable. However, the gain is simply deferred and there will be no market uplift on the donor’s death.
• By giving away part of the business, there could be worries about losing control of a business that has perhaps been built up over a working lifetime. 
• The business owner is losing a potential source of income by giving away part of the business.
• If the business is effectively the owner’s pension ‘pot’ with no other provision, how do they fund retirement?

The last two points can be addressed with forward thinking by early saving into a pension at the same time as building up the business. Many business owners may regard the value in the business as a means of funding their retirement, whether this is by selling the business or retaining control until death with access to ongoing dividends or profits. By diversifying into pensions, this will give the owner more options if they do want to ‘gift’ the business to the next generation.

Where a strategy of lifetime gifting is chosen, the possibility of failed PETs could be covered by short term protection policies covering the potential tax on the lifetime gifts and the loss of some or all of the £1M allowance for any business assets still in the estate on death.

Gifting into trust

The solution to losing control over the business through outright gifting could be to gift business assets into a discretionary trust while retaining control as a trustee. The other considerations for doing this are much the same as for outright gifts.

As the £1M allowance will refresh every seven years, this will allow gifts of up to £1M plus any available nil rate band every seven years without liability for any lifetime IHT. Any transfers in excess of allowances will suffer a lifetime charge of 10%. Provided such gifts are survived by seven years, there will be no further charges. There is, however, an opportunity to make gifts of qualifying assets before 6 April 2026 without suffering any upfront charges.

Discretionary trusts are of course subject to the relevant property regime which imposes a charge on every 10^th anniversary and when any capital ‘exits’ from the trust. Qualifying business property is currently excluded from the calculations of periodic charges. From April 2026, they will only be excluded if they are below the £1M allowance. Keeping it simple, in most cases the charge will be 6% of any excess (unless covered by the trust nil rate band), reduced to 3% by the 50% relief for qualifying business assets.

Advisers should be aware that the proposals include transitional provisions to ensure that the creation of several trusts will not benefit from multiple £1M allowances.  

Although there are still some unanswered questions in the consultation, broadly the proposals will apply to trusts as follows:

• Relevant property trusts created before 30 October 2024, and holding 100% qualifying BPR/APR assets on that date, will have their own £1M allowance when calculating relevant property charges.
• In addition, for pre-30 October settlements, it appears that exit charges will not be applied to capital distributions made before the first 10 year anniversary falling after 6 April 2026.
• The £1M allowance for trusts created on or after 30 October 2024 will be allocated to the earliest trusts first. For example, if the transfer of private company shares into the first trust is valued at £600,000, that trust will have an allowance of £600,000 to use at the periodic charge date. This would leave £400,000 to be allocated to the next settlement, and so on.

AIM shares

The consultation confirmed that qualifying private company shares will be entitled to the full £1M allowance, but that AIM shares will not - although they still qualify for 50% relief. There's nothing so far to suggest that so called ‘Business Relief asset backed’ schemes will be denied 100% relief on the first £1M, but private investors should ensure that such schemes are appropriate for them and that such schemes offer sufficient liquidity if business relief is withdrawn or reduced in the future.

Summary

The proposals so far are exactly that. The final details won't be known until publication of the legislation. The broad principles are unlikely to change, but some of the finer details may, so clients should be cautious if taking any immediate action.