Start planning now for Labour’s changes to Inheritance Tax

Sarah Jackson wrote for The Scotsman

In last year’s Budget, the Labour Government announced changes to Inheritance Tax (IHT) reliefs with restrictions to be placed on Agricultural Property Relief and Business Property Relief. These reliefs apply to certain agricultural or business assets to reduce their value for IHT purposes. Currently, the reliefs can apply at the rate of 100%, resulting in many farms and family businesses passing free of IHT to the next generation.

The government plans to limit these reliefs from 6 April 2026. Taxpayers will instead have a £1 million allowance to relieve qualifying agricultural and business assets at the rate of 100%. The excess will receive 50% relief (an effective IHT rate of 20%). It is likely valuations will therefore be required to assess the extent of the IHT exposure. The IHT may be paid in interest free instalments over ten years. Funding this liability will have to be considered with a view to minimising the impact of the charge on the business.

An open consultation was published in February, providing more detail on these proposed changes.

The consultation confirms that gifts made prior to 30 October 2024 are not impacted by these changes. Gifts made between 30 October 2024 and 6 April 2026 will be impacted if the donor dies after 6 April 2026 and within seven years of having made the gift.

From 6 April 2026, individuals will have a £1 million allowance to set against total qualifying assets (i) gifted post 30 October 2024 and within seven years of death; and (ii) held at the date of death. Any excess over £1 million will attract 50% relief. The allowance will refresh every seven years (in the same way as the nil rate band does currently).

Any unused allowance on the death of the first spouse or civil partner cannot be transferred to the survivor. This differs from the treatment of the nil rate band. Consideration should therefore be given to ensuring both spouses or civil partners hold qualifying assets and advice should be sought on the structuring, valuation and matrimonial law implications, of any transfers between spouses or civil partners.

The consultation also focuses on the application of the changes to existing and new trusts. A trust may hold an interest in a family business to facilitate succession planning, whilst retaining control and flexibility.

From 6 April 2026, trusts holding qualifying assets will also be entitled to a £1 million allowance which will be applied when calculating IHT charges within the trust itself. This is separate to the £1 million allowance available to individuals. Where the gift to trust takes place after 30 October 2024 only one £1 million allowance will be available amongst the donor’s trusts, to prevent planning involving multiple trusts with multiple allowances. For trusts established before 30 October 2024, each will benefit from its own £1 million allowance.

The policy announced in last year’s Budget remains and it seems likely the legislation will reflect these proposals. With only one year to go until the new regime comes into force, advice should be sought as soon as possible to allow sufficient time to undertake any required planning. There may be opportunities for tax planning prior to 6 April 2026 which are not available after that date.