Techzone

The changes to business relief (BR) and agricultural relief (AR) announced in the 2024 Autumn Budget will come into full force from 6 April 2026. This will be a trigger for any clients relying on these reliefs as part of the estate planning to reassess their IHT position and consider whether their existing wealth transfer strategies need to be amended.

While the qualifying conditions themselves are not affected, the key change is a cap on what qualifies for relief at 100%. Business assets qualifying for 100% relief, such as shares in the business, will be limited to £2,500,000 per individual. Qualifying assets over this value will only get relief at 50%. This may encourage entrepreneurs to bring forward any plans for succession planning by making gifts of business assets during their lifetime.

The other main change affecting advisers and their clients is in respect of AIM shares. These will only be entitled to relief at 50%, even if the 100% allowance has not been fully used, leaving clients with an increased IHT liability. Clients will need to reassess whether the balance between risk and reward for investments in AIM has shifted sufficiently enough to consider other IHT planning strategies such as trust planning using investment bonds.

To help advisers when discussing future planning with those clients affected, we've prepared a dozen things to consider.

The 100% allowance and IHT on death

1. The limit
100% relief will be restricted to a £2,500,000 of qualifying business and agricultural assets – known as the '100% relief allowance'. The IHT value for the death estate or on lifetime transfers over this limit will be reduced by 50%.

For example, an individual dies with £3,000,000 of qualifying business assets left to children in their Will. Ignoring any nil rate band, IHT will be £100,000 (40% of £250,000). This is a significant change as currently there is no restriction on relief at 100% and therefore no tax liability.

Remember, that the relief reduces the value transferred and not the rate of tax. This can have a big effect on the amount of transferable nil rate band. If in the above example, although the excess above 100% relief allowance is £500,000 the transfer of value is only £250,000 meaning there is £75,000 of unused nil rate band available to the surviving spouse.

2. Transferability
The allowance is transferable between spouses and civil partners, in a similar way to the nil rate band (NRB) and residence nil rate band (RNRB). If qualifying business assets are left a spouse, the spouse exemption will ensure there is no IHT on first death, with a 100% relief allowance of up to £5 million available on second death.

3. Apportioning the allowance
The allowance applies to the total value of business and agricultural property. Where an individual has both, the allowance will be split proportionately. For example, if the deceased owned £4,000,000 of agricultural property and £6,000,000 of business property, the allowance will be split £1,000,000 and £1,500,000 respectively.

4. AIM shares
From 6 April 2026, AIM shares will no longer qualify for 100% BR and will instead receive 50% BR only. This includes shares held via an EIS investment that are listed on AIM.

The value of AIM shares will not use any of the 100% relief allowance. The same is true for any other assets that are currently only relievable at 50%, such as land or buildings owned by an individual but used in their business.

Lifetime gifts

5. Gifting business assets to family
If the value of a business qualifying for the 100% relief allowance is more than £2,500,000, or £5,000,000 if the business is to transfer to a surviving spouse or civil partner, consideration should be given to making lifetime gifts to children, rather than waiting until death. Direct gifts will be potentially exempt transfers (PETs) and will not suffer an immediate IHT. Provided they are survived by seven years they will be exempt.

If control of the business is an issue, this can be retained by gifting qualifying shares to a discretionary trust with the owner as trustee. The gift will be a chargeable lifetime transfer (CLT) but again there will be no immediate IHT charge provided gifts are less than £2,500,000 in any seven-year period. Gifts made in excess of the allowance will suffer an immediate lifetime charge of 20% on half the value of the gift i.e. an effective rate of 10%. It may be possible to gift more than £2,500,000 without a tax charge if the trust has any of the normal nil rate band of £325,000 available to it.

If the donor does die within seven years of making the gift, and the individual or trust no longer holds qualifying BR assets or the assets no longer qualify for BR, then the relief is clawed back when reassessing the gift for IHT purposes on death.

The treatment of the gift after the relief clawback is different depending on whether the gift is a failed PET or a CLT.

• If the gift is a PET, the value used for any subsequent gifts being reassessed and the death estate is the value of the PET after the relief has been clawed back.
• For a CLT the value for those purposes remains the value of the CLT when it was originally gifted, i.e. before the BR is clawed back.

6. Resetting the allowance
The 100% allowance refreshes every seven years, allowing a rolling program of gifting with no IHT provided the seven-year cumulation value does not exceed £2,500,000.

7. Gifting AIM shares
Direct gifts of AIM shares will be PETs with no immediate charge. These will be exempt if survived by seven years. For failed PETs, IHT will be calculated in the normal way on 50% of the gift value, with taper relief applying to gifts survived by at least three years.

Gifts into a discretionary trust will be immediately chargeable to IHT if they are more than the main nil rate band (up to £325,000) available to the donor, chargeable at an effective rate of 10%. For deaths within seven years of a CLT, IHT will be recalculated at an effective rate of 20%, with taper relief applying to gifts survived by at least three years.

Where planning has been undertaken between 30 October 2024 and 6 April 2026 to move AIM shares into a 100% relief qualifying BR product, and replacement relief is being relied on, the new BR asset held will receive business relief at 50% until the 'replacement asset' has been held for 2 years. This is because replacement relief is only available up to the amount that the original asset would have received.

8. Gifts no longer qualifying for BR at time of death
Generally, BR is available on lifetime gifts at either 100% or 50% provided certain conditions are met, e.g. the asset has been owned by the donor for at least two years at the time of the gift. However, relief can be withdrawn, or 'clawed back', if the donor dies within seven years of the gift and the recipient no longer owns the asset (or qualifying replacement asset) or the asset no longer qualifies for BR. Broadly, IHT will be recalculated at 40% on the full value of the gift.

Don't forget that where business relief is clawed back on a PET for determining the IHT on the estate (and any subsequent gifts in the seven years before death), the value ignoring BR is used.

This differs from the claw back of BR on gifts into a discretionary trust where the failed CLT used in the calculation of IHT on the estate and failed gifts is still the value including business relief. This can result in the nil rate band being retained for use against the estate in gifts into discretionary trust but the same gift if made to an individual using up the nil rate band.

9. CGT considerations
Gifts will, however, be a disposal for CGT and clients will miss out on market uplift had assets been held at death. However, holdover relief will be allowed for gifts into a discretionary trust, deferring the charge until a later date. Prospective CGT charges should be weighed up against future IHT savings as part of the decision-making process.

Trusts

10. Periodic and exit charges
Trusts holding qualifying business property will be subject to both a 10-year periodic charge, and an exit charge when property leaves the trust. The IHT charged, if any, will depend on the amount of the 100% relief allowance available at each 10-year anniversary. If qualifying business property is less than the 100% allowance, there will be no charge on business property. If it exceeds the allowance, in simple terms this will result in a charge of 6% on half of the excess (or put another way, an effective rate of 3% on the full amount of the excess. Note, trusts may also have up to £325,000 of the normal nil rate band available to them.

Trusts created before 30 October 2024 will each get their own allowance of £2,500,000. If multiple discretionary trusts have been created on or after 30 October 2024, the allowance will be shared between the trusts in chronological order.

Other considerations

11. Residence nil rate band
For the purposes of RNRB tapering, the full value before relief of the BPR qualifying assets are included when calculating any available RNRB.

12. Other planning
If the value of business assets exceeds the 100% allowance, it should be remembered that the rate paid is still less than other 'non-business' assets comprised in the estate. Consideration should be given to gifting these assets either directly or by using trust based planning. Alternatively, the extra IHT payable as a result of the restricted 100% allowance could be insured against.