Autumn Budget 2024: Changes to Inheritance Tax on a business

One of the most talked about announcements from the Autumn Budget 2024 has been the cap on Agricultural Property Relief and Business Property Relief (BPR). Since the Budget was delivered, the newspapers have been full of articles highlighting the plight of farmers, but less has been heard from business owners who stand to be equally hard hit.

What is BPR?

BPR is one of the most valuable reliefs from inheritance tax (IHT), which exists to reduce the risk of IHT charges resulting in the break up of viable businesses when they are passed down the generations.

It has previously been possible to obtain 100% relief from IHT on a business or interest in a business, and on shares in an unlisted company, subject to satisfying the following conditions:

• The deceased owned the business or shares for at least two years before they died; and
• The business is classed as “trading” for tax purposes, is being carried on for a gain, and does not wholly or mainly consist of the following activities:
  • Dealing in securities, stocks and shares;
  • Dealing in land or buildings; or
  • Making or holding investments.

BPR at a rate of 50% is available on:

• shares controlling more than 50% of the voting rights in a listed company;
• land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
• land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

What changes were announced to BPR and APR in the Autumn Budget 2024?

• As from 6 April 2026, 100% relief will be limited to the first £1 million of combined agricultural and business assets for every person or pre-existing trust. Any agricultural or business assets above that threshold will be subject to IHT at a discounted 50% rate; i.e. an effective rate of 20% IHT on death.
• The £1 million of relief will be applied proportionately between agricultural and business property where the total value of the qualifying property is worth over £1 million.
• Assets that already qualify for 50% relief (as listed above) will not count towards the £1 million allowance, nor will AIM listed shares, which the Chancellor has announced will qualify for 50% relief as from 6 April 2026 (rather than the current 100% relief).
• The £1 million allowance is not transferable between spouses under the proposals as they stand. Careful planning will therefore be necessary to ensure that no allowance goes to waste.

We are awaiting more detail as to exactly how the new rules will apply to trusts, but the Chancellor has confirmed that the £1 million allowance will be available to trustees. Trusts created by the same settlor after 30 October 2024 will share an allowance between them, whereas those created prior to this date will each have their own £1 million allowance.

Whilst the new rules are not due to come into effect until 6 April 2026, anti-forestalling measures have been introduced for transfers made on or after 30 October 2024 where the transferor dies after 6 April 2026 but within seven years of the transfer, in which case the new regime will apply.

What do the new rules mean in practice?

Where someone has a qualifying business worth, say, £10 million (and no agricultural property), in the event of their death after 6 April 2026, £1 million of the business value will pass free of IHT, and the remaining £9 million will be taxed at 20% (assuming the nil rate band has already been utilised), resulting in an IHT liability of £1.8 million, compared to no IHT liability under the current rules. The more valuable the business, the higher the IHT charge, where previously there was none. This represents a significant tax policy change to what is a vitally important relief for businesses, and risks threatening the future of many established family businesses. If the proposals become statute, business owners will need to take timely advice and carry out a fundamental review of their succession plan.

Please contact a member of the Tax, Trusts & Succession team for more information and formal advice.