Government reveals details of inheritance tax reform on farms and businesses
3 March 2025
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Eight essential points
On 27 February the government published its consultation on the changes to inheritance tax (“IHT”) announced in the October 2024 Budget.
As is now well known, from 6 April 2026 only £1m of a person’s assets will be eligible for 100% agricultural property relief (“APR”) and business property relief (“BPR”). Beyond that £1m allowance, APR and BPR will be available at only 50%. The widely criticised changes will bring a huge number of farms and businesses into the IHT net.
The consultation clarifies some of the announcements made in the Budget and sets out how the new rules will apply to trusts.
There are a number of technical matters covered, but the eight key points to be aware of are:
The allowance (like the familiar £325,000 nil rate band) will ‘refresh’ every seven years, meaning that an individual can settle £1m of relievable property into trust every seven years. (There were concerns that the consultation would announce a £1m lifetime allowance.)
Unlike the £325,000 nil rate band, however, any unused portion of the £1m allowance cannot be transferred between spouses. We expect this point to be widely criticised in the consultation. But on the assumption that the government will not be diverted from its course, individuals should review their wills to ensure that everyone makes full use of their £1m allowance. The fact that the £1m allowance is not transferable may lead families to divide their businesses or farms between themselves in order to use as many allowances as possible. On a related note, the consultation proposes specific anti-fragmentation rules designed to prevent people depressing the overall value of their farm or business by dividing it between trusts and family members.
Helpfully, any pre-Budget succession planning (i.e. gifts of APR or BPR assets) will be subject to the rules at the time. So if someone dies after next April, but within seven years of having made a pre-Budget gift, the current rules (i.e. full BPR and APR) will apply.
IHT on agricultural and business property can be paid over ten years in interest-free instalments. As the interest rate on unpaid IHT is currently extremely high, this is helpful.
On an individual’s death, the £1m allowance will be shared with any trusts in which they have a ‘qualifying interest in possession’.
Trustees of ‘relevant property trusts’ (i.e. those that are subject to IHT charges every ten years) will have a £1m allowance, which will refresh every ten years.
Trusts created before the Budget that held relievable property will each have their own £1m allowance. For any trusts created subsequently, the settlor’s £1m allowance will be split between them.
For trusts created before the Budget, no IHT exit charges will arise on distributions of APR or BPR qualifying assets until those trusts have passed their first tenth anniversary. After the first tenth anniversary, the new regime will apply.
In conclusion, the details set out in the consultation are, in the main, sensible, albeit in the context of what is, for many business owners and farms, an enormously damaging change in the tax code. While we await the draft legislation, those affected by the reforms should seek specialist advice.
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Key takeaways for UK Private Clients – 2024 Autumn Budget
30 October 2024
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There are some finer details yet to be released, but here is a summary of the key takeaways from the 2024 Autumn Budget:
Capital Gains Tax (CGT)
Rates of CGT – immediate changes
Despite rumours of CGT hikes to bring rates in line with income tax, residential property rates for CGT remain at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. Non-residential property rates increase from 10% to 18% for basic rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers (including trustees and personal representatives).
Business Asset Disposal Relief – changes from 6th April 2025
The rates for disposals qualifying for Business Asset Disposal Relief will increase from 10% to 14% next April, and from 14% to 18% for disposals after 6th April 2026. See further detail in our briefing here.
CGT will be triggered on the return of assets to members on the liquidation of an LLP.
Inheritance tax (IHT)
We knew that IHT reliefs were under scrutiny, and there was a lot of speculation about the form any changes would take.
Before going through the changes, it is worth briefly explaining the current position. Broadly speaking, IHT is due on a person’s estate at 40% on the value over and above their IHT nil rate band (NRB) of £325k. It is also possible to claim the residential nil rate band (RNRB) of up to £175k when descendants inherit qualifying residences.
100% relief is available on business and agricultural assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR), with no cap on the value of assets to which the reliefs apply. Those reliefs were designed to ensure that farms and businesses could be kept intact from one generation to the next.
NRB and RNRB thresholds
The existing NRB and RNRB thresholds will be frozen until 2030. (The NRB has not changed since April 2009.)
APR and BPR
From next April, APR will be extended to land managed under an environmental scheme, although the details are yet to be confirmed.
From April 2026, 100% relief will continue to apply to the first £1m of combined APR and BPR assets, with the excess qualifying for 50% relief only. For example, if you own £2m of shares qualifying for BPR, £1m of those shares would attract 100% relief, and the remaining £1m would be subject to IHT of £200k.
There will be a consultation in March 2025 on how the new allowance will affect trusts subject to the so-called relevant property regime (which levies a charge of 6% every ten years on assets held in trust).
Estates will continue to benefit from the NRB, RNRB and other exemptions (e.g. to spouses, charities etc.). However, it has been made clear that if any of the £1m relievable property allowance is not used on death, it cannot (unlike the NRB and RNRB) be transferred to a surviving spouse. Outright gifts will also continue to escape IHT if made at least seven years before death – there had been concerns that Labour would increase the period to ten years.
There is no mention of the uplift on death for CGT purposes, and so it seems that it will continue to apply.
Assets currently qualifying for 50% relief will remain subject to that rate and will not use up any of the £1m allowance, meaning at least that the allowance is not ‘wasted’ on assets qualifying for a lower rate of relief.
Where there is a mixture of assets qualifying for APR and BPR at 100%, the £1m threshold will be divided proportionately. Taking the Government’s example “if there was agricultural property of £3m and business property of £2m, the allowance for the agricultural property and the business property would be £600k and £400k respectively”.
The instalment option can continue to be claimed on APR and BPR assets.
AIM
The rate of BPR on AIM shares will be reduced from 100% to 50%.
Pensions
Currently there is no IHT on unused pensions funds held in discretionary trusts.
From April 2027, IHT relief on pensions will no longer apply, regardless whether or not the unused pension funds are held in a discretionary trust. Pension providers, rather than the deceased’s personal representatives, will be responsible for sending HMRC the funds to pay the IHT on the unused pension.
It appears that recipients of the balance of unused pension funds (after pension providers have paid the IHT) will remain subject to income tax on withdrawals, meaning, in effect, a double tax charge.
IHT return (online filings)
HMRC will introduce a new online digital platform for filing IHT returns and managing payments.
Other
Private schools
As already announced, VAT will be charged on school fees from January 2025. The Government plans to legislate to remove the eligibility of private schools in England to business rates charity relief. It is intended that this will take effect next April.
Interest on late payment of tax
From 6th April 2025, the interest charged by HMRC on unpaid tax liabilities will increase by 1.5% to 4% above the Bank of England’s base rate. This will substantively increase the cost of claiming the instalment option on IHT.
The Taxation of Heritage Assets: Rebecca Meade writes for ThoughtLeaders4
9 February 2023
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Private Client Senior Associate, Rebecca Meade, has authored an article for the ThoughtLeaders4 Private Client Tax Magazine entitled ‘Saving heritage assets for the nation whilst saving tax – the taxation of heritage assets’.
In the piece, Rebecca covers the acceptance in lieu (“AIL”) scheme, that allows taxpayers to give ‘pre-eminent’ assets to qualifying public institutions in payment of inheritance tax. She goes on to address what is considered a ‘pre-eminent’ asset, provides an example of the AIL scheme in practice, and explains the various other tax reliefs available for national heritage assets.
An expert’s guide to…Women and Estate Planning – Rebecca Meade speaks to the Dura Society
20 December 2022
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Trusts and Estates (TTE) Senior Associate, Rebecca Meade, writes for The Dura Society and shares steps to take best advantage of her estate planning advice.
Did you know that, statistically speaking, women are more exposed to inheritance tax (“IHT”) than men?
This may be in part because women have a higher life expectancy and are, therefore, more likely to accumulate wealth.
It may also be because, according to a report published by the Office for National Statistics, despite usually being the ‘planning’ sex, 53% of women actually have no estate planning in place to ensure that their wish that assets pass to loved ones is fulfilled.
Which asset could help minimise IHT liabilities? Guy Abrahams, Rebecca Meade and Rebecca Welman write for International Adviser
24 June 2021
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Private Client Partner, Guy Abrahams, and Private Client Associate, Rebecca Meade, have authored an article for International Adviser on IHT liabilities.
UK inheritance tax (IHT) is due at a maximum rate of 40% on the value of an individual’s estate over their available IHT nil rate band, currently set at £325,000 ($448,500, â¬378,000).
There are ways to minimise IHT where individuals own what qualifies as a ‘national heritage asset’, which can be a picture, land, buildings, a book or manuscript, work of art or scientific object or a collection, or anything else considered pre-eminent for its national, scientific, historic or artistic interest.
An asset is pre-eminent if:
It has an ‘especially’ close association with the UK’s history and national life;
It is of especial artistic or art-historical interest;
It is of especial importance for the study of a particular form of art, learning or history; and/or,
It has an especially close association with a particular historical setting.
We expect that what amounts to a national heritage asset will change over time and as new art forms develop. It is not limited to stately homes and Old Masters. A letter written by Churchill, a Fred Sandbank sculpture and a collection of fossils are all examples of assets that have qualified.
Following the surge of investment in digital art and non-fungible tokens (NFTs), which saw the digital artist known as Beeple sell an NFT of his work for a record breaking $69m (£50m, â¬58m) earlier this year, it is probably only a matter of time before discussion turns to whether such works can qualify as national heritage assets.
Acceptance in lieu (AIL)
Taxpayers can transfer national heritage assets to public institutions such as museums and galleries in payment of tax. To encourage taxpayers to take advantage of the scheme, instead of selling assets and paying tax with the proceeds, there is a financial inducement, called a ‘douceur’, which is 25% of the tax payable or 10% for land.
Take, for example, an individual who dies owning a pre-eminent sculpture worth £1m. £400,000 of IHT would be due on it.
If the individual’s executors sell the sculpture on the open market and use the proceeds to pay the £400,000 of IHT, the net proceeds would be £600,000. But, if the executors use the AIL scheme, they would secure a douceur of £100,000 – 25% of the £400,000 tax – meaning they would have both paid the IHT on the sculpture and secured a £700,000 tax credit to set against the IHT on the individual’s remaining assets.
As a result, the beneficiaries end up £100,000 better off.
Assets must be offered for an AIL within two years of the relevant taxable event, which is typically a death. The Arts Council’s AIL panel then decides if an asset is pre-eminent and if they agree the value the taxpayer has given for it.
Following the panel’s recommendation, the final decision is made by the secretary of state for digital, culture, media and sport and, if accepted, the asset is allocated to a public institution.
It was recently announced that Stephen Hawking’s scientific and personal papers are the subject of an AIL. As a result, they will be on public display in various English public institutions as early as 2022.
Private treaty sale
Another way to offset some of the IT liabilities is through a private treaty sale.
This is similar to an AIL, except that a pre-eminent asset is sold to a public institution that pays the taxpayer a sum calculated on the same basis.
The price is negotiated between the taxpayer and the institution.
Using the example above, the executors would receive cash proceeds of £700,000.
Conditional exemption
If IHT becomes due on pre-eminent assets, owners can defer the tax indefinitely, provided they undertake to HMRC that they will keep the assets in the UK, preserve them, and allow “reasonable public access” to them.
What is reasonable public access has to be agreed with HMRC and will depend on the type of asset.
It could involve lending an object to a museum or gallery or, if it is to remain in situ, allowing public access for a certain number of days a year.
The exemption is conditional because a breach of the undertakings – a sale, typically – will mean the withdrawal of the exemption and the deferred tax charge falling due.
If the asset passes on death, or as a gift, the owner can renew the undertakings to avoid loss of the exemption.
Very few people, if any, enjoy paying tax – and inheritance tax is famously unpopular. One arrangement which can leave everybody happier involves paying your tax bill with special “things”, i.e. works of art, or anything that is exceptional enough to be accepted by the government in lieu of folding money. Many owners of great houses and their long-held collections take advantage of this arrangement, but the fact that others can also benefit from it is not as well-publicised as it should be. Here we give a brief overview of how those with special assets, or executors dealing with estates that include them, can benefit from the tax incentives available.
What are national heritage assets?
As this is an article written by lawyers, it’s inevitable that we begin by defining our terms, the key one being a “national heritage asset”. That can include a picture, land, buildings, a book or manuscript, work of art or scientific object (or a collection), or anything else that is considered pre-eminent for its national, scientific, historic or artistic interest. An asset is pre-eminent if it falls under any of the following:
It has an “especially” close association with our history and national life
It is of special artistic or art-historical interest
It is of special importance for the study of a particular form of art, learning or history
It has an especially close association with a particular historical setting.
A national heritage asset can be as large as a stately home and its surrounding park, or as small as a letter. We will now explain the tax incentives available to those fortunate enough to own what is, or could qualify as, a national heritage asset.
Acceptance in lieu
This scheme allows taxpayers (typically executors or trustees) to transfer national heritage assets to museums, galleries or other public institutions in payment of inheritance tax.
To encourage people to take advantage of the scheme (instead of selling assets and paying the tax with the proceeds) the government gives taxpayers a financial inducement, called a “douceur.” The douceur is 25% of the tax payable (or 10% in the case of land). It works as follows:
Mr Smith dies owning a David Hockney painting worth £1 million, which therefore attracts £400,000 of inheritance tax. The late Mr Smith was asset rich but cash poor, meaning his executors will struggle to pay the tax on his estate unless they sell the Hockney. If they sell it on the open market then, after paying the £400,000 tax on the painting itself, they will be left with £600,000. But if the painting were accepted by the Arts Council in lieu of tax, the douceur means that the executors would have a tax credit of £700,000 to set against the inheritance tax on Mr Smith’s estate. So, in short, by making use of the acceptance in lieu scheme, Mr Smith’s executors would secure an extra £100,000 for the Smith family.
Offers in lieu of inheritance tax must be made within two years of the relevant taxable event (typically a death). So the first step is, with the help of relevant experts, to identify a suitable asset (or more than one), to determine its value, and to make an application to Arts Council England. The panel at the Arts Council decides if it agrees that the asset is indeed pre-eminent, and whether the valuation that has been presented as part of the application is accurate. The Arts Council is independent of HMRC, ensuring fairness between the taxpayer and HMRC. Following the panel’s recommendation, the final decision is made by the Secretary of State for Digital, Culture, Media and Sport. If accepted, the asset is allocated to a public institution.
2019-20 was a record year for acceptances in lieu – £64.5 million of assets, including an extraordinary Gauguin manuscript never seen before by the public, and a Manet portrait, with recipient institutions ranging from the Bowes Museum to the National Gallery.
Private treaty sale
A private treaty sale is similar to an acceptance in lieu, except that the asset is sold to a qualifying public institution that pays the taxpayer an amount calculated on the same basis. The price is negotiated between the taxpayer and the institution. In the case of Mr Smith, this means the executors would receive cash proceeds of £700,000.
This approach is useful when the tax credit deriving from an acceptance in lieu would exceed the total tax bill, because you do not get “change” from an offer in lieu. A private treaty sale ensures that any excess remains with the taxpayer as cash proceeds.
Conditional exemption
If inheritance tax becomes due on, for instance, a collection of paintings, the owners can defer that tax indefinitely in return for agreeing with HMRC that they will keep the collection in the UK, preserve it properly, and allow the public access to it. That is very often the reason that a grand house is open to the public: at some point in the family’s past there will have been a taxable event, and rather than paying that tax at the time, the house or its collection (or both) were put on public display, and have remained so.
What is “reasonable public access” in this context has to be agreed with HMRC, and will depend on the type of asset. It could involve lending an object to a museum, gallery or other public institution.
As a general guide, for smaller buildings HMRC will require public access to the interior for a day a week, in addition to public holidays in the spring and summer. For larger buildings that are able to accommodate a large number of visitors, anything up to 156 days’ internal access might be deemed appropriate. In many cases, one can arrange for a collection or building to be accessible to members of the public only by appointment.
The exemption is “conditional” because a breach of the undertakings – a sale, typically – will mean the withdrawal of the exemption and the deferred tax charge falling due. If the asset passes on death, or as a gift, the new owner can renew the undertakings to avoid loss of the exemption.
Cultural Gifts Scheme
Introduced in 2013, this scheme encourages taxpayers (who are in philanthropic mood) to give national heritage objects to public institutions during their lifetimes.
The incentive is that a proportion of the value of the object donated to the nation is given as a tax credit. For instance, if you were to give away a £100,000 asset under the scheme, £30,000 could be deducted from your income tax or capital gains tax bill.
2019-20 was a record year for the scheme, with public institutions acquiring various objects, from the relatively modest – a letter from Churchill used to settle £3,000 of tax – to the more substantial – a collection of drawings and prints that will settle just short of £600,000.
There is not time here to mention the charities that owners of collections can create, or the added complications that arise if a collection is still within the scope of estate duty (which was the precursor to inheritance tax).
For as long as it remains government policy to acquire special assets – and there are no indications that that policy is going to change – those fortunate enough to have them will have interesting and favourable options available.
The article was first published in Cazenove Capital on 8 April 2021.
