Here, Oscar Wingham discusses the changes and planning considerations for family businesses, farm and landowners, and others impacted.
What is BPR and APR?
BPR is an Inheritance Tax (IHT) relief for business owners and was introduced to avoid companies breaking up, or disposing of assets, to pay death duties.
It provides IHT relief for either a lifetime transfer or against the deceased’s Estate, and covers:
- A business or interest in a business (100% relief)
- Shares in an unlisted company (100% relief)
- Shares controlling more than 50% of the voting rights in a listed company (50% relief)
- Land, buildings or machinery owned by the deceased and used in a business in which they were a partner or controlled (50% relief)
- Land, buildings or machinery used in the business and held in a Trust that it has the right to benefit from (50% relief)
APR is an inheritance relief available on the agricultural value of agricultural property for either a lifetime transfer or against the deceased’s Estate, and covers:
- Agricultural land or pasture that is used to grow crops or to rear animals
- Stud farms for breeding and rearing horses and grazing
- Trees that are planted and harvested at least every 10 years
- Woodland occupied with and ancillary to the land and pasture
- Farm buildings, farm cottages and farmhouses
With both reliefs, there is some further eligibility criteria to consider.
What is changing?
APR and BPR will remain in place, but the 100% relief now only applies to the first £1m of relevant assets per Estate. This is a combined limit for both agricultural and business property.
From 6 April 2026, property worth over this limit will attract IHT at the 40% rate, albeit at a 50% discounted rate, giving an effective IHT rate of 20% on all relevant business assets above £1m.
For example, if someone dies after April 2026 holding shares or agricultural property worth £2m there will be no IHT on the first £1m, but IHT will be charged on the balance at the effective rate of 20%. This amounts to £200,000 which, prior to the budget, would have been nil.
“For me this is the most significant announcement arising from this Budget. The limit on BPR will impact family businesses and could prevent them from being passed down the generations. In addition, valuing company shares will now be a critical aspect when dealing with Estates. This will add stress, cost, and time to filing IHT returns. No doubt, HMRC will also scrutinise the values, adding uncertainty to some already difficult situations.
Similarly, APR was introduced to safeguard farms from being sold on death, providing inter-generational farming security and these measures put this at risk.
In London and the South-East, the £1m restriction is likely to be insufficient for even the smallest farms, so practically all farmers can now expect to be subject to IHT on their deaths. Faced with this significant charge, and in the absence of other liquidity, it may lead to the break-up or non-succession of farm businesses in the future.”
Actions to now consider
How much is the business worth?
It may now be helpful to understand what your business is worth and what each individual shareholding may be valued on death, so you can understand the potential IHT exposure and put planning in place.
Review your business structure, ownership and Wills
It is important to review the share structure in family businesses. For example, for a business worth £2m, where the shares are split equally four ways between two parents and two children, this should mean each individual shareholding will be less than £1m. However, if you have a company worth £4m, and hold the shares with your spouse, this could present a potential IHT issue under the new rules.
You could consider updating your Will to pass shares directly to your children instead of your spouse. With the above example of a business worth £2m, if £1m worth of shares were left to the two children, then there should be no IHT on first death, and that would leave the spouse with shares worth £1m, so there should be no IHT charge on second death either.
Consider lifetime gifting
You may want to gift shares to your children in your lifetime or transfer them into Trust for the next generation, especially if your children are still young.
This planning is still tax efficient if the current regime on lifetime gifts and holdover relief from Capital Gains Tax remain unaffected by the Budget. However, the detail remains to be published.
Also, for gifts to be effective for IHT purposes, the donor cannot benefit from them, so this will not be a viable option for farmers who are financially dependent on their agricultural assets.
There are also other aspects you should consider. Any gift must be ‘without strings’ so you are no longer the legal owner. If the gift is a property, you must pay a market rent if you wish to continue to live in it. It will also place you in an unprotected position and could cause problems if there is a family disagreement, divorce or bereavement.
If you transfer shares, but wish to retain day-to-day control or management, then the company’s Articles of Association and a Shareholders’ Agreements will need consideration.
“Reviewing share structures, considering wider family ownership and Wills is an important action for anyone holding shares in a family business.”
Consider setting up Trusts
Trusts are often used for IHT planning because gifts can be made whilst retaining an element of control. However, Trusts are complex and can be expensive to run, so you should seek professional advice before deciding.
Whilst Trusts can still be worthwhile, there were some changes for Trusts in the Budget which limits their effectiveness for IHT planning.
Anti-forestalling rules were brought in to tackle transfers of APR/BPR assets into Trust from the date of the Budget (30 October 2024) onwards. For new Trusts being set up after the Budget, the Government intends to introduce new rules so that the allowance is divided between Trusts (if there are multiple Trusts set up by an individual) rather than each Trust having the benefit of the £1m allowance as was the case before the Budget.
“There will be a technical consultation on the changes as they relate to Trusts, opening in early 2025 and we will be waiting for any further updates in this area.”
How will you fund IHT bills?
Ultimately, these changes mean that many family and agricultural businesses face greater IHT bills in future. So, attention should turn to how the family pays for the IHT on their business or agricultural property.
Extracting funds from the company to pay the IHT might be an option. However, a dividend will result in a double tax bill, potentially incurring the higher dividend rate of 39.35% and the new BPR charge of 20%. Worse still, if the company must sell an asset, the company could suffer Corporation Tax on the gain and the shareholders could suffer Income Tax on the dividend to pay the IHT. So, planning is essential.
A life insurance policy could also potentially provide cover for additional IHT liability on family business or agricultural assets, subject to premiums. This is an area where specialist help is needed and we can introduce clients to professional contacts who can assist.
Seek professional advice early
With these changes coming in, it places a greater emphasis on thinking ahead when it comes to IHT and succession planning – so get started with your IHT planning today.
Contact our experienced tax team to discuss your options and the tax advice, Trust advice or valuation services that you might need.
Oscar heads our tax department and provides advice on tax structuring, planning and compliance services to entrepreneurs and their businesses.