With the dust now settled on Rachel Reeves’ first budget, it is important to consider the implications of the budget for Inheritance Tax (IHT) planning.
Key points to consider:
- Inheritance Tax relief for trading businesses (Business Relief)
The £1m per person Business Relief limit is a significant change. After this threshold, a 20% IHT charge applies. For married couples or civil partners, this relief is not transferable. If not fully utilised upon the first death, the surviving spouse won’t inherit a £2m exemption. Therefore, for clients holding or likely to hold shares worth more than £1m, it’s crucial to ensure both partners hold shares to maximize the available relief.
2. Further Planning for Larger Business Valuations
For clients whose businesses exceed the £1m tax-free threshold, additional planning will be necessary. A common strategy may be gifting shares during their lifetime. However, many business owners are concerned about losing value or control by doing so. Careful planning is essential as consideration of different classes of shares can help strike the right balance between tax mitigation, control, and financial benefit.
- Inheritance Tax on Pensions
Although it wasn’t entirely unexpected, the tax treatment of pensions is worth noting. For individuals who pass away after 6th April 2027 their unused pension funds will be subject to IHT. Furthermore for clients who die at the age of 75 or above, their beneficiaries will still pay income tax when they draw the funds, potentially leading to an effective tax rate of 67% or more. For clients who are unlikely to need their pensions, gifting the funds during their lifetime, while still subject to income tax, could avoid the IHT charge as a gift from excess income.
- IHT Treatment of AIM Shares
AIM shares now face a 20% IHT charge on death, and unlike other trading assets, there is no £1m IHT allowance. For some, this reduced tax relief may not justify investing in the AIM market, which is inherently high risk. While we are not financial advisers, we are aware of alternative investment opportunities that can still benefit from the £1m tax-free allowance.
- The Importance of Multi-Generational Planning
With significant IHT reliefs now being removed, the concept of multi-generational planning has never been more important. Lifetime gifting, the use of trusts, and corporate structures will all play a role in balancing tax liabilities with wealth preservation for future generations.
As always, there is no one-size-fits-all approach to IHT planning. Specialist advice is essential to craft the right long-term strategy for each client. Please contact us on +44 (0)161 832 3434.
