UK inheritance tax proposed changes

With just five months until new inheritance tax (IHT) laws come into force, farmers and business owners need to act quickly to mitigate the potential impact on their estates.

That urgency follows the Labour Budget in October 2024, where there were a number of significant announcements in relation to IHT. The proposed changes represent a seismic shift in the UK IHT regime, one which has prompted many farmers and business owners to consider their IHT position.

Under the current IHT rules, agricultural property and business assets meeting certain conditions are exempt from UK IHT.

The impact of the restriction on reliefs

In the past, a “do nothing” approach may have been the default option as no IHT may have been paid on death on agricultural and business assets, and such assets are inherited with a tax-free value uplift for the heirs.

However, from 6 April 2026, the government will introduce a £1 million cap on the assets eligible for IHT relief. For any value above the £1 million cap, an effective IHT tax rate of 20% will apply. This is half of the standard 40% IHT rate which applies to assets which do not qualify for any IHT exemptions.

The impact of the restriction on reliefs is that, for the first time, farmers and business owners may be exposed to and have to fund an IHT liability. In order to pay an IHT bill assets may have to be sold or an IHT payment fund will have to be set aside. Where inherited assets are not sold by the beneficiaries, other tax costs may arise which means that the overall tax rate may be significantly in excess of the 20% headline rate. This is likely to have a significant impact on the business, especially from a cash flow perspective. The table below provides a simplified illustration of the potential impact:

Susan Smyth

Director

KPMG in Ireland

mail
call

However, given the proposed changes, reviewing existing IHT and succession plans is imperative. Key considerations include:

Review wills

Review wills now to ensure that the potential IHT reliefs are considered including the £1 million cap.

Gifts during lifetime

Gifts during lifetime may now be more attractive. A gift to an individual will fall outside the scope of IHT provided the person making the gift survives for seven years. There is also a reduced rate of tax which applies where the person making the gift survives between three and seven years after the date of the gift. However, at times there is a reluctance for individuals to lose control of the gifted of assets and this may be a difficult decision. This is particularly the case in some family businesses where a gift may alter family dynamics or where there is no clear next generation succession.

Consider trust planning

In the absence of IHT relief, there would be a 20% upfront IHT charge on asset value passing into a trust. Before 6 April 2026, it may be possible to potentially transfer qualifying farm and business assets into a trust without this upfront IHT charge. Although a trust may result in certain tax complexities they are a long-standing option considered by individuals. A trust can include a range of potential beneficiaries and this can defer the decision as to who should ultimately control key family assets.

Consider liquidity and funding

Consider liquidity and funding of potential IHT liabilities. HMRC allow a taxpayer to pay an IHT liability over a 10-year period, however estates must still plan to meet the cash flow. Seeking life cover to help fund future IHT payments should be considered.

Engage early professional advice

With detailed draft legislation already published it is important that all options are considered and an informed decision is made.

The IHT reforms mark one of the most significant changes to the IHT regime in recent years. While intended to raise government revenue, they raise existential challenges for many family farms and business owners. There is speculation that there could be further announcements in the next Budget on 26 November. These announcements could include further tightening of some other aspects of the IHT rules. There have also been unsubstantiated rumours of some potential relaxation of the proposed restriction on the reliefs for farmers and business owners.

On the basis there is going to be significant reform of the IHT regime, recalibration of long-term plans around family farming & business assets should be considered to ensure that all parties are clear as to the potential implications of these changes.