Kudos to David Downie, Technical Consultancy Manager and the Aberdeen Adviser team, for preparing ten points to consider when planning with clients affected by the upcoming changes agricultural and business reliefs.
Cuts to the amount of agricultural (AR) and business reliefs (BR) available will take effect from 6 April 2026. Farmers and business owners will have welcomed the increase in the value of assets attracting 100% relief from £1million to £2.5 million.
But clients who have incorporated AIM portfolios to reduce their IHT exposure will see the amount of relief halved on their entire portfolio and may need to revisit their estate planning.
We’ve prepared ten points to consider when planning for affected clients.
The 100% allowance:
1. The limit100% relief will be restricted to a £2,500,000 of qualifying business and agricultural assets – known as the ‘100% relief allowance’.
The IHT value for the death estate or on lifetime transfers over this limit will be reduced by 50%.
For example, an individual dies with £3,000,000 of qualifying business assets left to children in their will. Ignoring any nil rate band, IHT will be £100,000 (40% of £250,000).
This is a significant change as currently there is no restriction on relief at 100% and therefore no tax liability.
Remember, that the relief reduces the value transferred and not the rate of tax. This can have a big effect on the amount of transferable nil rate band.
If in the above example, although the excess above 100% relief allowance is £500,000 the transfer of value is only £250,000 meaning there is £75,000 of unused nil rate band available to the surviving spouse.
2. Transferability
The allowance is transferable between spouses and civil partners, in a similar way to the nil rate band (NRB) and residence nil rate band (RNRB).
If qualifying business assets are left a spouse, the spouse exemption will ensure there is no IHT on first death, with a 100% relief allowance of up to £5 million available on second death.
3. AIM shares
AIM shares will no longer qualify for 100% BR and will instead receive 50% BR only. This includes shares held via an EIS investment that are listed on AIM.
The value of AIM shares will not use any of the 100% relief allowance. The same is true for any other assets that are currently only relievable at 50%, such as land or buildings owned by an individual but used in their business.
Lifetime gifting:
4. Gifting business assets to family
If the value of a business qualifying for the 100% relief allowance is more than £2,500,000, or £5,000,000 if the business is to transfer to a surviving spouse or civil partner, consideration should be given to making lifetime gifts to children, rather than waiting until death.
Direct gifts will be potentially exempt transfers (PETs) and will not suffer an immediate IHT. Provided they are survived by seven years they will be exempt.
If control of the business is an issue, this can be retained by gifting qualifying shares to a discretionary trust with the owner as trustee.
The gift will be a chargeable lifetime transfer (CLT) but again there will be no immediate IHT charge provided gifts are less than £2,500,000 in any seven-year period. Gifts made in excess of the allowance will suffer an immediate lifetime charge of 20% on half the value of the gift i.e. an effective rate of 10%.
It may be possible to gift more than £2,500,000 without a tax charge if the trust has any of the standard nil rate band of £325,000 available to it.
5. Resetting the allowance
The 100% allowance refreshes every seven years, allowing a rolling program of gifting with no IHT provided the seven-year cumulation value does not exceed £2,500,000.
6. Gifting AIM shares
Direct gifts of AIM shares will be PETs with no immediate charge. These will be exempt if survived by seven years.
For failed PETs, IHT will be calculated in the normal way on 50% of the gift value, with taper relief applying to gifts survived by at least three years.
Gifts into a discretionary trust will be immediately chargeable to IHT if they are more than the main nil rate band (up to £325,000) available to the donor, chargeable at an effective rate of 10%.
For deaths within seven years of a CLT, IHT will be recalculated at an effective rate of 20%, with taper relief applying to gifts survived by at least three years.
Where planning has been undertaken between 30 October 2024 and 6 April 2026 to move AIM shares into a 100% relief qualifying BR product, and replacement relief is being relied on, the new BR asset held will receive business relief at 50% until the ‘replacement asset’ has been held for 2 years.
This is because replacement relief is only available up to the amount that the original asset would have received.
7. Gifts no longer qualifying for BR at time of death
Business relief can be withdrawn, or ‘clawed back’, if a lifetime gift of qualifying assets is made and the donor dies within seven years of the gift.
If the recipient no longer owns the asset (or qualifying replacement asset) or the asset no longer qualifies for BR, IHT will be recalculated at 40% on the full value of the gift.
Where business relief is clawed back on a failed gift the knock-on effect on the estate is different depending on whether it was a failed PET or failed CLT – which produces a rather unexpected result.
For the purpose of the seven year cumulation period of the estate,
- Failed PET the value ignoring BR is used.
- Failed CLTs use the value with BR still applying.
Surprisingly, this can result in the nil rate band being retained for use against the estate in gifts into discretionary trust but the same gift if made to an individual using up the nil rate band.
8. CGT considerations
Gifts will, however, be a disposal for CGT and clients will miss out on market uplift had assets been held at death. However, holdover relief will be allowed for gifts into a discretionary trust, deferring the charge until a later date.
Prospective CGT charges should be weighed up against future IHT savings as part of the decision-making process.
Other considerations:
9. Trust periodic and exit charges
Trusts holding qualifying business property will be subject to both a 10-year periodic charge, and an exit charge when property leaves the trust.
The IHT charged, if any, will depend on the amount of the 100% relief allowance available at each 10-year anniversary.
If qualifying business property is less than the 100% allowance, there will be no charge on business property.
If it exceeds the allowance, in simple terms this will result in a charge of 6% on half of the excess (or put another way, an effective rate of 3% on the full amount of the excess.
Note, trusts may also have up to £325,000 of the normal nil rate band available to them.
Trusts created before 30 October 2024 will each get their own allowance of £2,500,000.
If multiple discretionary trusts have been created on or after 30 October 2024, the allowance will be shared between the trusts in chronological order.
10. Residence nil rate band
For the purposes of RNRB tapering, the full value before relief of the BPR qualifying assets are included when calculating any available RNRB.
Main image: markus-spiske-4XbEgggW93o-unsplash
