Budget 2024 – BPR reform and resulting impact on IHT liability
This article originally appeared in the Scottish Motor Trade Association (SMTA) magazine Scots Autoscene Issue 20 in February 2025.
Business Property Relief – what you need to know
There were significant changes to the effective rates of Inheritance Tax (IHT) announced at the 2024 Autumn Budget. Although the press has labelled the changes the “Farmers’ Tax” a substantial and probably larger number of trading businesses in the motor industry are affected too through the loss of Business Property Relief (BPR) for IHT purposes combined with the inclusion of pension pots as part of the Death Estate after April 2027.
To make matters worse there is still a level of uncertainty as to how the legislation will be implemented as a “Detailed Technical Note” about the changes that HMRC promised would be published at the start of 2025 is still outstanding at time of publishing in February 2025. What follows is commentary on what we do know at the date of publication and it is still bad news all round.
Loss of BPR
Family business owners have formulated long-term succession plans on the overriding understanding that full relief from IHT would be available to them on the value of that business on death.
The proposed reforms to BPR will, if implemented, prompt considerably different succession plans.
BPR in its current form reduces the value of relevant business property when calculating the IHT due, either on death or on lifetime transfers and transfers into trust, at a rate of 100%. There is currently no limit on the amount of value which can be reduced.
It is proposed, from April 2026, BPR at 100% will be capped to the first £1 million of qualifying assets. Thereafter, the relief will effectively reduce the IHT payable by 50%, in addition to existing allowances and exemptions. In effect, the value of such assets above £1 million will be subject to IHT at 20%.
We have included an example of how the new rules would apply to a family business Boss Motors, co-owned by Jack and Diane. In this instance, a £96,000 IHT liability would arise under the new rules, as opposed to zero liability previously.
Family business owners should review the existing capital structure to identify their potential IHT liability under the new rules. Depending on the value of the business and the age and number of shareholders, some family businesses may find considerable value will be sheltered from IHT under the new BPR allowance rules, particularly where shareholdings are diversely held and value in the business is fragmented.
Otherwise, concentrated shareholdings held by elderly owners in capital intensive businesses now potentially face significant IHT liabilities without the cash to settle the bill in the six months after death.
In terms of reducing the value of an estate, the seven-year rule for Potentially Exempt Transfers (PET) remains in place. This essentially exempts from IHT gifts that are made between individuals more than seven years before death. However, gifts of this nature require careful planning, to ensure the shareholders retain sufficient income and capital to support their needs, and to ensure that Capital Gains Tax (CGT) and other tax liabilities do not arise unexpectedly on transfer.
Any key decisions should probably await the publication of the detailed commentary promised as part of the legislative consultation process. That said, older business owners, following years of settled succession plans, may well wish to consider gifting now to start the PET seven-year clock running.
Pensions
The other significant Budget announcement concerns undrawn pension funds and death benefits – currently (mainly) exempt for IHT purposes. It is proposed that such funds are due to fall within a person’s estate from April 2027.
As well as an increase in taxable assets, the inclusion of pensions in the value of an estate could cause tapering of the residence nil rate band (for those estates currently around £2 million). There may also be income tax implications to consider for the beneficiary on accessing funds inherited.
The main takeaway from the proposed changes is for individuals to review succession planning strategy and transfer wealth to future generations as efficiently as possible. Reviewing wills will be essential to reflect any new rules. Professional advice from an experienced tax planning specialist is recommended to navigate the complexities of the new rules. If you require assistance with anything discussed in this article, please get in touch with our tax team at tax@thomsoncooper.com.