It is said the Inheritance tax is paid by either the ill-informed or the unlucky. Whilst it may be a provocative statement there is more than an element of truth to it.
There has been quite a bit of heated debate amongst the farming community in the past months about the forthcoming changes to both Agricultural Property Relief (APR) and Business Property Relief (BPR). This is because the Government is proposing to reduce the rate of relief from 100% to 50% for agricultural/business property worth more than £1m from April 2026 – thus creating an inheritance tax bill where none was previously expected.
It is clear that the farmers are deeply concerned at being landed with large inheritance tax bills as a result of the post death transfer of an asset rich, but cash poor farm and it is an argument which many have been sympathetic towards. However there appears to be no sympathy from Treasury ministers who have up to now remained steadfast that the changes will become law in 2026.
Whilst the farmers have been very vocal in their opposition to the reduction in the reliefs, there has been a much more muted response from the wider business community. Of course, not every business will be asset rich and cash poor, however, if a business is worth £5m then from April 2026, £4m will become liable to inheritance tax with only 50% BPR being available. This would lead to an IHT bill of £800k. Of course many businesses have cash on their balance sheets which could help to pay this bill, however to get the cash out of the company to pay the inheritance tax bill, there will be an income tax charge of up around 40% which could cost over £500k in income tax (on top of the £800k of IHT) to fund the inheritance tax bill — maybe the business community should be a bit more vocal about this!!
There is still an opportunity to put in place some planning to mitigate or eliminate the exposure to inheritance tax. A lifetime gift to the next generation can be made inheritance tax free – which will remain so as long as the donor lives for seven years. Such gifts may also be subject to capital gains tax and will thus require careful consideration. If it is not desirable or appropriate to pass the business down to the children just yet, a gift to a trust is also still an option but the ability to do this without an immediate charge to IHT will become less attractive post 5th April 2026. However, under both these alternatives, an early (unfortunate) death could result in an IHT charge still arising and thus it may be appropriate to put in place a bespoke life insurance policy to mitigate this exposure.
The old maxim of “give early and give often” is likely to see a revival. Add to that “and stay alive for 7 years” and there is less chance of being either ill-advised or unfortunate!