Planning for the future- the sunset of BPR
After the announcement of its imminent demise in October 2024, and despite the well publicised protests, the end of unlimited reliefs for Business Property and Agricultural Property arrives on 5 April 2026.
From 6 April only £2,500,000 of unquoted shares, sole trades, trading partnership interests and other qualifying assets will be effectively exempt from IHT for each individual, with the excess being taxed at half of the main rate; potentially a 20% tax charge on significant value on the death of a shareholder. The P/E multiples loved by entrepreneurs selling their businesses become a double edged sword when used to value a company for a tax levy.
The charge can be deferred until a second death through the spouse exemption, with a surviving spouse having both their own £2.5m allowance and the ability to claim any unused allowance from the deceased spouse. Despite the Treasury forecasts for growth in the economy and its underlying businesses, it is unlikely that this £5m maximum tax allowance will see regular increases.
With business interests often representing one of the largest assets in an estate, there will be a material liability to be funded.
It is now supposed to be easier to obtain probate “on credit” in cases of extreme illiquidity and it is possible to pay the IHT due on unquoted shares over 10, interest free, instalments but the account will have to be settled, and this will normally be funded out of the business.
There is no income tax exemption for dividends taken to fund IHT and they may be impractical if the business value rests in its enterprise value rather than reserves. It may be possible to arrange a repurchase of shares if cash in the company permits, but this will change the relative shareholdings and has to be effected within two years- of death, not the grant of probate- for CGT treatment to apply.
Either route leads to a drain on the cash of the company, depleting the amounts available for working capital and investments.
Unfortunately death is both inevitable and its precise timing unknowable. Holding cash reserves or easily realisable investments against the future demands will itself result in no BPR being available on the value of those assets, leading to IHT at 40%. At the extreme end, investments in the company can prejudice its status as at least mainly trading, a condition for the shares to qualify for BPR at all.
Business interests will now share some of the planning characteristics of other assets. At its simplest this is means giving away the assets that are not needed, either from a capital or an income producing perspective. Retaining benefits from assets will usually undermine any IHT planning.
At present, assets inherited on death are received at the probate value so any capital gains that accrued in life are washed away. This applies even where the assets are not subject to IHT, for example if inherited by a spouse or exempted by BPR.
Lifetime planning aims to avoid the IHT charge but, in the case of business assets, the uplift foregone and a CGT liability pending for the future.
It is impossible to rehearse all of the considerations when passing assets to individuals and the changes will not affect these lifetime gifts, they will remain potentially exempt and drop out of consideration entirely in due course.
An opportunity still exists for the use of lifetime trusts. If assets qualify in their entirety then they can be settled into trust before 6 April 2026 with no limit on value. With trusts having their own allowance of £2.5m after 5 April, shared between trusts created by the same person, separate from the individual’s own allowance this mechanism will allow four allowances in total between a married couple, provided the assets are gifted and retained in appropriate way so that each person has at least £2.5m of value at the relevant dates. In simple terms, a broad discretionary trust with extensive trustee powers may act as a default vehicle.
After 5 April trusts may still play a role, but the maximum value that can be added without an immediate tax charge will be restricted to £331,000.
For individuals looking to take advantage of trust planning before 6 April there are several steps that need to be completed urgently:
- Initial advice on whether it is appropriate;
- Assessment of the activities, valuation and assets of the business
- Drafting of Deeds and associated documents- which will require qualified legal expertise
- Confirmation of all permissions necessary, especially for jointly owned businesses
- Execution, implementation and filing of all paperwork and associated returns
As mentioned above, the changes to BPR do not mark the end of IHT and business succession planning. Other routes still exist to pass down value to future generations and there are various strategies to help businesses built up over years continue to thrive and provide into the future.
