Is this the end for IHT reliefs?

The Inheritance Tax changes announced in the Autumn Budget have certainly caused a stir. Particularly in the farming world, with the recent protests being heavily publicised in the media.

The introduction of a cap for only the first £1 million of BPR or APR assets to qualify for relief has potentially exposed many farmers and business owners to significantly higher IHT liabilities.

Simon Hurren looks at what you can do if you’re affected by these changes.

Understanding the impact to you

Before making any rash decisions, you should take advice to understand what your potential IHT position looks like following the changes. Quantifying the impact should help to give context to your decisions.

Cash flow

Once you understand the impact of the changes, it’s wise to consider the executor’s cash flow and their ability to be able to pay the IHT liability. Clearly if a large proportion of wealth is held in share or land then it may not be easy to realise cash flow, but the following options can be considered:

• Borrowing funds to settle the liability. Is this manageable?
• Life insurance – depending on your age and health this might not be an option.
• Selling part of the business or farmland. This is less practical for a business as it. Likewise, the sale of any land can take time to sell and there would be further tax consideration on the sale.

Make Gifts

Historically, in many cases it has been beneficial to retain ownership of assets which qualify for relief, but the changes may warrant an acceleration of passing on assets. However, it’s unfortunately not so straight forward:

• Any gift will only be outside of your Estate after 7 years.
• Will the gift trigger a capital gains tax liability, or will holdover relief apply?
• Do you still need any income from the asset. Many farms run as a partnership with each partner sharing the profits and dependant on the partnership for an income. Once any assets have been gifted it’s important to demonstrate that you have not retained any benefit, such as an income, from the assets as this could be caught by anti-avoidance legislation, gift with reservation of benefit, which would result in the asset still forming part of your estate.
• Will the assets be exposed to marital breakdowns of the future generations

Whilst on the face of it gifting assets seems a sensible step to mitigate the impact of the changes, seeking advice about how the intricacies of the rules will apply to you and your family’s circumstances is important.

It’s also worth mentioning that whilst the focus has been on farms and business owners the changes will also impact those who have invested in IHT efficient schemes like the EIS investments and shares in unquoted stock markets such as the AIM stock market.

Review your Wills

Currently the nil rate band and residential nil rate bands not used on the first death will transfer to the surviving spouse for them to utilise. This has led to many Wills allowing all assets to the surviving spouse on the first death. However, in the details of the announcement it was clear that the £1 million allowance for BPR and APR is not transferrable to a spouse. Therefore, consideration will need to be given as to whether BPR or APR assets should not be left to a spouse to utilise the allowance and potentially save up to £200,000 of inheritance tax.

Thought will also need to be given to the bigger picture, including protection and control over assets and whether a surviving spouse may need an income from the assets.

Pensions

Prior to the Budget speculation was rife around possible changes being made to pension contributions. Ranging from changes to the income tax relief on pensions to the  removal of the Pension Commencement Lump Sum (often referred to as the tax-free lump sum).

The only change the Labour government decided to introduce was to bring pensions into the scope of Inheritance tax.

For many years, pensions have been used as a tool for Inheritance tax planning. In certain circumstances they could be left to beneficiaries free of Inheritance tax. This has led to many people deciding to use other assets to cover living expenses in preference to the pension pots.

So, with the changes announced, does this flip that plan on its head?

Well, it’s important to remember that the changes only come into play from April 2027, and HMRC are currently consulting on the specifics of the changes announced. As a result, we don’t yet have the legislation that will provide some of the necessary detail.

The inclusion of the pension pot into the IHT calculations could also impact the availability of the residential nil rate band, which starts to get tapered once gross assets exceed £2 million. So careful planning will be needed to ensure the residential nil rate band in preserved.

Therefore, it would be sensible to wait until the further details are announced, and for those minded to start planning, to now take account of some important factors to consider.

As always, the decisions and actions that are right for you will depend on your individual circumstances. But you can start by thinking about the following

• What level of income do you need for your living costs, and can the pension replace other sources of income?
• How much of your pension income can be drawn in a tax efficient manner to utilise your tax bands?
• Where drawing additional income from your pension could push you into a higher tax band, could tax efficient investments such as EIS and VCT be considered to help mitigate the tax impact?
• Can gifts be made to utilise the IHT gift exemptions, such as normal expenditure out of income, and to help pass assets to the next generations to reduce your overall IHT liability?

Overall, these changes are likely to have a significant impact on many individuals’ IHT liability. And it’s vital take advice to fully understand the impact of the changes before considering the available options and next steps. and how these will apply to your own personal situation.

In many cases, the changes will form part of a wider succession plan and so consideration of the bigger position is always a priority.

To discuss how these issues may affect you, get in contact with Simon or one of the Private Client team by calling 0330 058 6659 or by emailing hello@scruttonbland.co.uk.