The Chancellor delivered her long awaited first budget and with it has fundamentally changed the Inheritance Tax (IHT) reliefs that have existed for many years. As well as bringing more value into people’s estates through the inclusion of inherited pensions from April 2027, business and agricultural reliefs have also been reformed, making them less attractive.
Changes to agricultural and business IHT reliefs
Currently, individuals are entitled to an IHT ‘Nil Rate Band’ of up to £325,000, in addition, where certain conditions are met they can also claim a further ‘Residence Nil Rate Band’ of up to £175,000, giving £500,000 of relief or £1 million for a married couple. Amounts in excess of this are subject to IHT at 40%. These bands were frozen on 6 April 2009 and were to remain frozen until 6 April 2028.
In addition to the above, Agricultural Property Relief (APR) and Business Property Relief (BPR) are available to reduce the value of a qualifying asset by 100% for IHT, effectively exempting such assets from IHT. The qualifying assets include:
Interests in trading businesses
Unquoted shares in a trading company
Shares listed on the Alternative Investment Market (AIM)
There is currently no restriction on the amount that can be claimed, meaning that businesses can be passed down to the next generation free of IHT.
From 6 April 2026, the Chancellor has made the following changes:
The amount of APR and BPR available at 100% will be restricted to £1 million
The rate of APR and BPR on amounts above this threshold will be restricted to 50%, meaning an IHT charge of 20%
Shares listed on the AIM will not benefit from the 100% relief on the first £1 million and so any shares held will be taxed at 20% IHT
IHT nil rate bands will remain frozen for a further two years until 6 April 2030
Family-owned businesses will need to carefully consider how these measures may impact on their estate and future succession plans. In the past, for businesses that benefitted from full relief from IHT, the older generation would remain in the business until they died, passing the business on to the next generation free of IHT. However, they would now be advised to carefully consider how they will deal with succession to ensure they obtain the best relief and minimise the tax liability the next generation will have to pay to continue the business.
Those with Alternative Investment Market Shares may also want to consider the impact of today’s IHT reforms as any holdings in these shares will not benefit from a £1 million exemption but will be immediately chargeable to IHT at 20% from April 2026.
The long-term impact of these changes is hard to predict but for family-owned businesses this will significantly change the way they operate their businesses and secure their future.
Capital Gains Tax changes
On top of the changes to IHT, the Chancellor also had Business Asset Disposal Relief in her sights. This relief taxes disposals of businesses at a rate of 10% on the first £1 million, and 20% thereafter. However, from April 2025, this rate will begin to change, with the 10% rate increasing to 14% initially before increasing a year later to 18%.
Businesses will need to carefully plan their business disposals and the ownership of the shares to maximise the relief now available at these lower rates. Care will be needed to ensure that all shareholders meet the conditions, and so advice will be vital.
Additionally, the Chancellor has raised the rate of Capital Gains Tax (CGT), for disposals made on or after 30 October, so that it now mirrors the residential rates, which remain unchanged. CGT is charged on the increase an asset, such as shares and second properties, makes over its period of ownership.
The rates of CGT will increase:
from 10% to 18% for those chargeable gains that fall within the basic rate band, i.e., gains, which when added to your income are below the higher rate threshold of £50,270.
from 20% to 24% for gains above the higher rate threshold to match the higher residential rates
These changes are expected to raise £1.4 bn in the next year, rising to 2.4bn by the 2029/2030 tax year.
Budget analysis webinar
On October 31st, we hosted a Budget Analysis webinar, analysing the Chancellor's announcements and the potential consequences for both businesses and individuals.
If you would like advice and support about how these changes impact the succession or disposal of your business, please get in touch. Call 0808144 5575 or email help@armstrongwatson.co.uk.
