From April 2026, the rules on inheritance tax (IHT) relief for UK business assets changed
- Each person will receive a £2.5m allowance on qualifying business assets (BPR).
- Business assets above this allowance will be taxed at a reduced rate of 20% (rather than 40%).
- Following a change of heart by the government, this allowance is transferable between spouses.
IHT is payable on all UK assets, regardless of your nationality or domicile, subject to certain exemptions. This includes UK property and shares and investments in other UK companies, so the new rules may affect some of our international clients as the changes could have a significant impact on cross-border estate planning and tax exposure.
Here is a quick overview of how the changes could affect your planning:
- It can be sensible to leave your BPR eligible assets into a discretionary trust (of which your spouse can be a beneficiary) to ensure the exemption is obtained and it allows for some possible further tax planning e.g. double dipping of the relief.
- If your business assets are worth more than £2.5m you may wish to transfer some of them to your spouse so they can use their exemption. Your spouse would need to hold the gift for 2 years to qualify for their own relief, so life cover might be worth considering in the meantime.
- If the total value of your estate, including any business assets, is above £2 million, your entitlement to the residence nil rate band (an additional inheritance tax allowance when leaving your home to direct descendants) begins to taper away. This makes reviewing your will especially important to ensure the allowance is not lost.
- From April 2027 your taxable estate will include your pension(s), making it even more likely your estate will be above £2 million.
- If there are business assets in your pension it is important to take advice on whether you should try to take them out – e.g. the factory. If this is in your SIPP your personal representatives/pension beneficiaries will have to find 40% tax within 6 months from the end of the month that you die in one go or interest will be payable (currently 7.75%). BPR is only 20% and can be paid over 10 years – much less of a shock to the business.
- Trusts can provide flexibility and protection if your business changes (e.g. sale or restructure).
- It is important to act quickly as you will need an accurate valuation of anything gifted and specialist valuers are getting booked up.
These changes create both risks and opportunities. Reviewing your estate and succession planning now could help preserve your £2.5m allowance and save your family significant inheritance tax in the future.
Contact our head of private client, Miriam Spero at ms@branchaustinmccormick.com today, to explore the best options for your business and loved ones.