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How will inheritance tax changes impact my farm, business or private pension?





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The UK Government's overhaul of Inheritance Tax (IHT) rules were announced in the Autumn Budget, attracting significant media attention. While these changes are not yet in force, it is important to be aware of how they might impact you – particularly if you own a farm, business, or certain type of private pension.

Mark Stewart, Brodies LLP
Mark Stewart, Brodies LLP

What are the three major changes?

These are:

• new restrictions to Agricultural Property Relief (APR) and

• Business Property Relief (BPR), and

• a new charge on unused pension pots on death.

They will apply to a person's estate where death occurs on or after the date the new rules become effective.

What is the change to APR and BPR?

Currently, there is no cap on the value of assets owned by an individual that can be relieved from IHT by APR/BPR – these are currently unlimited. From 6 April 2026, there will be a cap of £1 million of APR and/or BPR assets that can qualify for complete relief, but any surplus value over and above £1 million will incur IHT at an effective rate of 20%.

For example, a farm valued at £5 million can currently pass to the next generation without any IHT on death. In future, that farm is likely to incur an £800,000 IHT bill on death.

If my farm or business has to pay IHT because of the changes to APR/BPR, will I have to sell up?

Possibly. An option will be to pay the IHT via ten annual (probably interest-free) payments. This might be funded by profits or other funds available, or by borrowing, where possible. If the burden of making those payments (and any interest on borrowings incurred) is not viable, then the farm or business, or part of it, would need to be sold.

Another concern, particularly for those who hold the business or farm in a company, is that there will also be additional tax consequences in extracting the funds from the company to meet the IHT.

What about the IHT change to pensions?

Currently, an individual with a private "pension pot" can, upon death, usually leave that pot to anyone they wish. In most cases, the pension pot passes on death without any IHT charge.

The IHT 'shelter' that exists for pensions will be removed entirely for deaths that occur on or after 6 April 2027. The value in the pension pot will be added to the other assets in the deceased's estate and will be subject to IHT (up to 40%).

If IHT is payable in future on my pension, where will this be paid from?

Generally, it will be paid from the pension, leaving less to be passed on.

If I pass my farm, business or pension pot to my husband, wife or civil partner, will I be affected?

Not initially, because the surviving spouse exemption will apply – that has not been restricted. But that effectively kicks the can down the road because the changes will then affect the farm, business or pension pot when the surviving spouse dies.

What other planning opportunities are available?

Some actions can be taken to diminish the impact of the changes, but these have different consequences – which may or may not be acceptable to you. For businesses, and farms, lifetime giving and surviving seven years remain an option – but there are Capital Gains Tax, financial and control consequences.

Spouses and civil partners can organise their estates to ensure that each individual can pass £1 million of APR/BPR assets to the next generation – that will save £200,000 of IHT. But again, there are control consequences. Individuals can increase withdrawals from their pensions to make lifetime gifts to family, possibly using the "gifts from surplus income exemption" – but there may be income tax liabilities and personal financial issues to consider.

Should I take action now?

If you think you might be affected, seek initial professional advice from an IHT expert to determine the extent of the impact on you and your heirs. The legislation relating to these changes is not likely to be published until spring 2025, at which point further details will become clearer.

Partner Mark Stewart is head of personal and family at Brodies LLP, based in Inverness.



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