Budget 2024: Capping of valuable IHT relief - Bad for Business and Farm Alarm
Andy Wood • November 5, 2024
Budget 2024: Capping of valuable IHT relief - Bad for Business and Farm Alarm
Firstly, let’s be honest, its great to see HMRC referring to Business Property Relief again. None of that Business Relief nonsense that has crept in over recent years.
I would say that is probably the most significant part of the Budget.
Of course, you might also be interested in the pretty seismic cuts to:
- Business Property Relief; and
- Agricultural Property Relief
You are?
That’s disappointing. I was hoping to save my poor fingers.
Here we go then.
Business Property Relief (“BPR”)
The Budget announced that both BPR and APR will become subject to a £1m cap from April 2026.
Presently, there is no cap on either meaning, that assuming assets qualify for the relief, both lifetime gifts and assets in the death estate can benefit from relief at a rate which is often 100%.
In respect of BPR, for example, the shares in an unquoted, family trading business will qualify for BPR at 100% as long as the shares have been held for two years.
This means that they can be:
transferred into trust without an immediate IHT charge (and often no 10 year charge and no exit charge if the assets are still held at the relevant time);
the subject matter of an outright gift and, even it that PET fails, there will be no IHT; and
form part of the death estate without there being an IHT charge
As I say, the value of relief could be unlimited.
However, there is now a cap of £1m.
Beyond that, relief is capped at 50%.
It should be noted that these changes only apply to the 100% rate. The following business property will qualify for 100% relief:
- property consisting of a business or interest in a business;
- unquoted securities of a company which give the transferor control of the company immediately before the transfer;
- any unquoted shares in a company (see below re changes to AIM shares)
If the assets only qualified for the existing 50% rate, for example, a controlling interest in a quoted company, then the new rules do not effect the position – 50% relief applies to the entire value (and does not use up any of the cap).
Agricultural Property Relief (“APR”)
The same cap will also apply to agricultural land.
The following agricultural assets qualify for 100% relief:
where there is a right to vacant possession, or vacant possession is obtainable within 12 months (extended, by concession, to 24 months and to circumstances where the tenanted value and vacant possession values are broadly similar).
where the property is let on a tenancy beginning after 31 August 1995 (or, in Scotland, a tenancy acquired after that date by right of succession).
where the transferor was beneficially entitled to the interest transferred before 10 March 1981 and relief would have been available under the rules then in force.
Again, the first £1m of value related to these assets will qualify for the 100% relief with the balance being subject to relief at just 50%.
For assets which already only qualify for 50% relief, these are unaffected by the changes.
Interaction of BPR and APR under the new £1m Cap
The £1m cap applies across both. In other words, you don’t get £1m for BPR and £1m for APR… the spoilsports.
Instead, the cap is allocated proportionality over agricultural and business assets.
So, in a scenario where Jimmy has the following assets qualifying for BPR / APR reliefs at 100%:
- £3m of BPR assets; and
- £2m of APR assets
The cap is allocated as £3m/£5m x £1 = £600k to BPR and £2m/£5m x £1m = £400k to APR assets.
The balances receive relief at 50%.
The £1m Allowance and Trusts
A trust will also get a £1m allowance to cover the 10 year charge and also exit charges.
It will be applied in the same way, with any assets that qualify for the 100% relief being exempt up to the first £1m with the balance being subject to tax at 50%.
Where a person sets up multiple trusts on or after 30 October 2024, we are told that there will be anti-avoidance rules that split the allowance between those trusts.
AIM Shares
In addition, AIM shares will no longer benefit from 100% relief where held for two years.
This is because relief of 50% will now apply to any shares that are listed on non-recognised stock exchanges. The AIM market will be such an exchange (ie not a recognised exchange).
This removes an odd feature of the legislation that I have commented on quite a few times in the past. Click here to read.
Conclusion
These are really big changes which will fetter the ability of business owners and / or farmers to pass on their businesses to the next generation of the family.
As such, consideration will need to be given on alternative plans such as outright gifts and life insurance.
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