As the UK government prepares to make significant changes to the Business Property Relief (BPR) and Agricultural Property Relief (APR) for inheritance tax (IHT), it’s essential for business owners, farmers, and individuals holding valuable agricultural or business assets to act quickly.
These changes could have a profound impact on your inheritance tax liability, potentially leading to unexpected financial burdens for your heirs.
In this article, we will guide you through the current legislation, explain the proposed changes, and, most importantly, show you how to take proactive steps today to reduce the impact that any future inheritance tax may have on your estate.
By being proactive, you can avoid the financial consequences of failing to plan.
Current Legislation: What Is BPR & APR?
Business Property Relief (BPR) and Agricultural Property Relief (APR) are two key reliefs available in the UK to reduce the amount of inheritance tax that is due on certain assets upon death.
BPR provides up to 100% relief from inheritance tax on qualifying business assets. This includes shares in unlisted trading companies, land, and buildings used in the business.
APR offers relief for agricultural property, reducing or eliminating inheritance tax liability on farm buildings and agricultural land that is actively used in farming.
These reliefs are designed to help business owners and farmers pass their wealth on to the next generation without incurring hefty inheritance tax bills that could threaten the viability of family businesses and farms.
However, the government has announced plans to alter these reliefs. This could mean the loss or reduction of these valuable exemptions, leading to potentially higher inheritance tax liabilities for many.
What Changes Are Coming?
The government has indicated that it will review and potentially tighten the criteria for BPR and APR. While the exact details remain uncertain, there are key areas that could be affected:
BPR Business Property Relief Eligibility: The UK government has announced forthcoming reforms to Business Property Relief (BPR) as part of its 2024 Budget, set to take effect from 6 April 2026. Under the new regulations, the 100% BPR available for qualifying business assets will be capped at the first £1 million, with relief thereafter reducing to 50% for amounts above this threshold. These changes aim to ensure that BPR is utilised more effectively and to limit potential tax avoidance strategies. Individuals and trustees involved in business ownership should review their succession plans in light of these reforms, particularly regarding lifetime gifts and potential inheritance tax liabilities. As the transition period continues, seeking professional advice will be crucial to navigate the implications of these significant changes in tax relief.
APR Agricultural Property Relief Restrictions: The main change is that IHT relief will be confined to the first £1 million of combined agricultural and business property. Above this, landowners will pay IHT at 20%. The normal, unrelieved rate is 40%. Government points out IHT bills can be paid interest free over a period of 10 years.
These potential changes are not just a theoretical concern—they are probably coming. And if you're not prepared, your estate may be hit with a significant inheritance tax bill that could have been avoided.
The Financial Consequences of Not Taking Action
Failing to take proactive steps in light of these potential changes could lead to significant financial consequences. Inheritance tax in the UK is charged at 40% on the value of an estate above the £325,000 threshold (The Nil rate Band) or £650,000 for married couples
Additional relief is available for qualifying home owners up to £175,000 but this is subject to limits, this means the maximum available threshold for a married couple (excluding business or agricultural assets is £1Mn).
Under the proposed new rules regarding BPR or APR, your heirs could face an inheritance tax bill that erodes their inheritance, particularly if your estate includes business assets, agricultural land, or other assets that are crucial to the future of your family’s financial legacy.
These changes are approaching, and it's important to take action soon.
How to Proactively Prepare: 3 Key Strategies that we can advise and arrange.
1. Gifting Assets Into Trust
One of the most effective ways to reduce inheritance tax liability is by gifting assets into a trust. By transferring ownership of business or agricultural property into a trust, you can remove these assets from your estate, meaning they won't be subject to inheritance tax when you pass away. This can be done during your lifetime, ensuring that your family benefits from the reliefs available today—before any changes are made to the legislation.
Trusts can also provide you with continued control over the assets, ensuring they are managed and passed on in line with your wishes, while benefiting from IHT relief.
2. Whole of Life Insurance
When considering inheritance tax (IHT) planning, implementing a whole of life insurance plan can provide necessary funds to cover potential tax liabilities after death. For individuals, this typically involves a single life plan written in trust for designated beneficiaries, while couples may opt for a joint life second death policy. Selecting a guaranteed premium product ensures fixed costs, though reviewable premiums may offer lower initial rates with flexibility for future adjustments based on changing liabilities. For instance, Mary, who plans to reduce her estate’s value through gifts and investments eligible for tax relief, took out a reviewable premium policy to ensure liquidity for her IHT liability while positioning her estate for future tax efficiency. It's crucial that such policies be written under trust to ensure the proceeds remain outside the estate, thereby avoiding additional tax burdens. Effective estate planning requires a trusted framework and ongoing strategy to adapt to changes in both personal circumstances and tax legislation.
3. Gift Inter Vivos Insurance
Gift inter vivos refers to an insurance policy designed to cover inheritance tax (IHT) liabilities arising from lifetime gifts made by an individual. When a person gives a gift during their lifetime, the gift may be subject to IHT if they pass away within seven years. Gifts are exempt from IHT if the individual survives for seven years, but if they die sooner, the value of the gift is taxed on a sliding scale known as taper relief. A gift inter vivos policy helps mitigate this liability by providing life insurance coverage that reduces over time in line with the taper relief, ensuring the beneficiaries are protected from unexpected tax bills. However, it's crucial to consider whether taper relief applies, as it only affects the rate of tax and not the value of the gift, and to establish the proper structure for the policy, such as placing it in trust, to avoid increasing the estate’s tax liability.
The sooner you start planning the better.
If you delay and fail to take action in your inheritance tax planning, you could leave your estate vulnerable to unnecessary tax charges. These charges have the potential to affect your family's financial future. It's important to consider strategies that can help mitigate these risks and ensure that your loved ones are protected. Taking proactive steps now can help secure your estate and provide peace of mind for you and your family.
You might consider a range of options – either individually or collectively – based on the inheritance tax liability your estate may face. By taking measures such as transferring assets into a trust, securing whole of life second death insurance, and making inter vivos gifts, you can help protect your generational wealth and potentially reduce the financial impact of inheritance tax on your estate. It's advisable to assess your situation and consult with a professional to determine the best strategy for your circumstances.
Why you shouldn't wait until the government has enacted the changes to BPR and APR.
Delaying action on inheritance tax planning can expose you to several risks.
The government have outlined their plans regarding changes to BPR and APR, which may increase your tax liability, so waiting could leave you vulnerable to higher taxes.
Additionally, if you pass away within seven years of making a gift, taper relief applies, reducing the tax burden over time.
Waiting too long means missing out on this benefit, resulting in a higher tax rate.
Your estate's tax liability could also rise due to inflation.
Delaying action could lead to complications in your estate planning, making it harder to manage multiple gifts and liabilities.
Furthermore, failing to set up trusts early means the insurance proceeds may be included in your estate, increasing the inheritance tax liability.
Whole of Life Insurance becomes more expensive the older you become, it's always more affordable to secure and lock in an affordable premium while you're eligible for cover.
With property and asset values rising, your estate may soon exceed the tax-free allowance, so early planning ensures you're not caught off guard.
Taking action now offers more flexibility and allows you to structure your policies and trusts in the most tax-efficient way for your family.
Contact our trusted financial adviser now to discuss your options and ensure your estate is prepared for the upcoming changes. Taking proactive steps today could save your family from a devastating inheritance tax bill tomorrow.
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