The tricky business of life and death

Planning Ahead: Ensors

This thought comes to mind especially when considering the likelihood of changes to the restriction of inheritance tax (IHT) reliefs announced at the October 2024 budget. 

The optimist will think that if they are prepared to scrap or amend so many key policies, what is one more? The pessimist will point out that having failed to make several tax rises/spending cuts stick, it becomes imperative for the government to see through the ones that remain.

If it is a case of ‘he who shouts loudest’, then business owners seem to have been insufficiently vocal.

So, let us assume that the proposed new rules (limiting the availability of 100% agricultural and business property reliefs to £1m, with the remainder getting 50% relief) will come into effect as of April 6 next year. How does that impact IHT planning strategies?

Limiting liability

Previously, planning for IHT has generally been built around variations on two distinct themes.

If you have no assets likely to qualify for a relief, then to mitigate the tax due, the best option is to gift on early, relying on surviving seven years in order to take the value completely outside of your estate – but there are obstacles. Will the gift trigger an unacceptable capital gains tax liability? Does the taxpayer still need to retain use of/income from the asset? Against these, there are possibilities for mitigation – invest in property that does obtain a relief, insure against the liability, use trusts.

The foregoing is largely unchanged as a result of the proposed changes.

Those with business property can undertake the planning outlined above, but they also had an alternative. In relation to property that qualifies for 100% IHT relief, they could let it pass on in their will. This was useful for a number of reasons, including the fact that if the older generation still had an input and/or required the income from the business, they could benefit until death.

The restriction of reliefs to 50% now has the effect of changing the optimal planning of many of those who have such property from ‘retain until death’ to ‘gift as early as possible’.

They will, of course, face the same challenges as those for whom that was always the better option. In particular, trying not to fall foul of the ‘gift with reservation’ trap. What do you do if you still need the income? Again, insurance and trusts can be of some assistance.

As has always been the case, there is no ‘one size fits all’ solution, but for some there will be ways to mitigate the worst of the fallout from the changes. However, those with no real voice will bear the brunt – those for whom surviving the seven year clock is unlikely, those with limited life expectancy, those who have lost capacity.

If ever there is a case for a U-turn, this should be it. 

The information contained within this article is for general guidance. Specialist advice should always be sought in relation to your particular circumstances. No liability is accepted by Ensors for any actions taken without seeking appropriate professional advice.