EXCHEQUERS, CHECKS AND CHANGE: THE IMPACT OF THE BUDGET ON INHERITANCE TAX

Anyone who has ever spent time watching thriller or horror movies will know that building a sense of anticipation is integral to keeping audiences on the edge of their seats.

Viewers constantly expect something dramatic to happen but aren’t really sure what it will be.

Such has been the situation over the last few years for people with an interest in Inheritance Tax (IHT).

This time last year and with Rishi Sunak on the ropes, his Chancellor of the Exchequer, Jeremy Hunt, was said to be mulling over changes to IHT in an effort to improve the Government’s standing with voters in the run-up to the General Election (read more).

After he was replaced in number 11 Downing Street this summer by Rachel Reeves, the speculation about IHT only intensified – and with good reason.

Among a raft of measures in her first Budget was a series of shifts which she insisted would make IHT “fairer” (read more).

The reaction, however, has been so intense as to suggest that her initiatives are anything but.

She has set out how the headline threshold known as the Nil Rate Band above which IHT becomes liable will remain in place.

It currently applies to estates worth more than £325,000 and had been extended until 2028 by the Conservatives but will now continue as it is for a further two years.

The fact that there has been no adjustment in the Nil Rate Band since April 2009 has been regarded as the principal reason for record amounts of IHT received by HMRC (read more).

In the last financial year, it was only just under £7.5 billion – up 40 per cent in the last five years alone (read more).

As house prices continue to climb, more families find themselves inadvertently at risk of having to pay IHT because of a quirk of geography and a surge in property values (read more).

Even so, the Government and HMRC have been at pains to point out that relatively few people actually pay IHT.

According to data published by the Revenue in July, the tax was applicable to only 4.39 per cent of estates during the tax year 2021-’22 (read more).

Nevertheless, where the Chancellor really caused a stir was in her much-anticipated decision to alter the rules relating to Agricultural Property Relief (APR) and Business Property Relief (BPR).

Land which is used for agricultural purposes and passes between family members on the owner’s death has been fully exempt from IHT under the terms of the Inheritance Tax Act 1984 (read more).

Business Property Relief is a similar exemption and was introduced in the mid-1970s to enable family-owned businesses to continue trading after the death of their founders without the need to sell shares or even the entire firm in order to meet an IHT bill (read more).

It has also been available on sums invested for at least two years in companies listed on the Alternative Investment Market (AIM), a branch of the London Stock Exchange specialising in smaller, unlisted companies.

Two years ago, some £1.57 billion worth of APR was claimed, compared to £2.85 billion worth of BPR. Almost three-quarters of that BPR (£2.04 billion) related to reliefs claimed in relation to AIM investments.

Rachel Reeves’ Budget means that from April 2026, the 100 per cent relief will be halved for farms and businesses worth more than £1 million.

Furthermore, unused pension funds and death benefits payable from a pension pot into someone’s estate will be considered liable for IHT for the first time from April 2027.

The reason, explained the Chancellor, was to remove “the opportunity for individuals to use pensions as a vehicle for inheritance tax planning”.

Whilst the shift in the treatment of pensions has irked many people whose pensions were solely part of prudent planning for their retirement and not a tax dodge, it is the way that the Government has moved the ground on APR and BPR which has generated more of a backlash.

Farming organisations have denounced it as a betrayal which threatens the successional working of the land that has been a feature of Britain’s history over centuries (read more).

Small business owners have also reacted with dismay.

They are part of a community which makes up the vast majority of companies in the UK, employing nearly nine million people and producing one-fifth of all private business turnover (read more).

What the Budget has undoubtedly done is increase the likelihood of more families having to pay IHT than ever before.

That raises the prospect of individuals having to sell some or all of their enterprises to meet an IHT bill – the very situation which legislation in the 1970s intended to avoid.

It is easy to see why some commentators have concluded that the Government has potentially penalised many small firms in order to achieve its objective of “closing loopholes in the tax system”.

Furthermore, among the changes introduced by Rachel Reeves was an increase in the interest charged on unpaid tax liabilities from 7.5 per cent to nine per cent (read more).

So, families perhaps facing the possibility of an IHT bill will find it compounded by a higher charge should they not be able to pay it immediately.

Statistics do show that neither IHT nor existential challenges to family businesses are certainties.

What the Budget has done, though, is reinforce the importance of estate planning, particularly in cases where individuals intend for agricultural or commercial assets to pass down through generations.

Taking specialist advice sooner rather than later – especially in advance of the changes announced by Rachel Reeves coming into force – is firmly recommended and perfectly legal.

Such preparatory work holds out the promise of insulating the value of estates now and into the future.

Doing nothing could carry far more serious consequences which would be all the more awful for being – at least, in part – avoidable.

ENDS