The Budget was one of great expectations and great trepidation. There was genuine fear over potential changes to pensions relief, capital gains tax and inheritance tax . As it turned out, we got change in all of those areas of taxation but the change wasn’t as onerous as it could have been. There seems to have been some strong evidence of “compromise”.
Did the government have the Laffer principle in mind when it crafted the “ less than the worst” changes to all of those areas of taxation?
In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, meaning there is a tax rate between 0% and 100% that maximises revenue. Make the rate too high and behavioural change kicks in to avoid paying the tax and the desired additional yield is diminished.
So, with this in mind, maybe we had:
- Higher CGT rates but not the full rates of income tax.
- Subjecting “unspent/leftover” pensions to inheritance tax, but no change to tax relief, tax-free cash, a reimposition of the lifetime allowance or reduction of the annual allowance.
- Higher taxation on “carried interest”, but not full rates of income tax.
- Limitations on business relief and agricultural property relief, but not a complete removal of the relief.
The latter change has caused much debate. Many of the questions currently being asked will hopefully be answered through the proposed technical consultation that will take place in early 2025.
We got change in all of those areas of taxation but the change wasn’t as onerous as it could have been
This will focus on the detailed application of the allowance to lifetime transfers into trusts and charges on trust property. This will inform the legislation to be included in a future Finance Bill. There will no doubt be a continuing flow of representations from interested parties.
So, what are the details based on the information we have available to us?
It was announced that the government will introduce a new £1m allowance that will apply to the combined value of property in an estate qualifying for 100% business property relief and 100% agricultural property relief to replace the current regime under which relief is unlimited for both asset types.
There is a special separate new rule for quoted shares that are quoted but ”unlisted“ for IHT purposes (eg, AIM listed shares).
In relation to qualifying property other than unlisted quoted shares, if the total value of the qualifying property to which 100% relief applies is more than £1m, the allowance will be applied proportionately across the qualifying property, with any excess qualifying for relief at the lower rate of 50%.
For example, if there was agricultural property of £3m and business property of £2m, the 100% allowance for the agricultural property and the business property will be £600,000 and £400,000 respectively (and vice versa), with the remainder qualifying for relief at 50% only.
Assets automatically receiving 50% relief (such as assets owned personally and used in the business of a trading company) will not use up the allowance. The £1m 100% allowance would seem to apply to each individual transferor (so £2m between spouses/civil partners if they each own £1m of qualifying business and/or agricultural property), but unused allowance will not be transferable between them.
The policy paper published on Budget Day states that the allowance will cover the following transfers:
- Property in the estate at death.
- Lifetime transfers to individuals in the seven years before death (“failed potentially exempt transfers”).
- Chargeable lifetime transfers where there is an immediate lifetime charge, so for example when property is transferred into trust.
It is assumed that the allowance is a lifetime allowance that will apply only to the first £1m of business and/or agricultural property transferred by the same transferor – whether during lifetime or on death.
Many of the questions currently being asked will hopefully be answered through the proposed technical consultation
There will be a combined £1m allowance for trustees on the value of qualifying property to which 100% relief applies, on each ten-year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to inheritance tax on death. The government will publish a technical consultation in early 2025 on the detailed application of the policy to charges on property within trust.
Settlors may have set up more than one trust comprising qualifying business property and/or agricultural property before 30 October 2024, in which case from 6 April 2026, each trust would have a £1m allowance for 100% relief.
The government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.This principle is not unlike the rule that applies in relation to the annual CGT exemption when the same settlor establishes multiple trusts.
The government will publish a technical consultation in early 2025, which will provide further insight into the proposals and inform the legislation that will be included in a future Finance Bill.
The £1m allowance will take effect for deaths on or after 6 April 2026. However, anti-forestalling measures will provide that the new allowance will also apply to failed lifetime transfers of business or agricultural property made on or after 30 October 2024, if the donor dies on or after 6 April 2026.
Business owners not planning to sell their businesses during their lifetime may wish to bring forward succession planning by introducing other family members, such as adult children, into the business at an earlier stage in the hope of surviving seven years and reducing the value of business property in the estate to within the £1m allowance by the point of death.
Professional advice could be sought on the potential merits of a reorganisation of share capital into different share classes to facilitate the transfer of wealth in such a way that doesn’t impact on control and dividend allocation. As for any lifetime transfer strategy, due consideration will need to be given to the potential CGT consequences of any such transfer.
This will be so even when, as for business assets, the gain can be held over (deferred). There remains a tax-free revaluation of chargeable assets on the death of an owner for CGT.
Business and farm owners should seriously consider the potentially powerful solution that appropriate life insurance in trust can deliver
Business owners and farmers in a position to transfer business or agricultural property into trust prior to 6 April 2026, would appear to be able to do so without any immediate IHT charge regardless of the value transferred. However, if death occurs after 6 April 2026 and within seven years of the transfer, the £1m limit will apply for the purposes of recalculating the IHT – the age and state of health of the client will therefore be key in determining whether this is a viable strategy. Again, CGT would need to be considered.
Business and farm owners should, in addition to lifetime transfers when appropriate and subject to commercial considerations, seriously consider the potentially powerful solution that appropriate life insurance in trust can deliver in order to meet any new liability that could arise as a result of this limitation in business and agricultural property relief.
Where investment in AIM shares or other business relief investments that do not qualify for the 100% allowance on the first £1m is being considered, then while the investment will not be as IHT attractive if 100% relief is not available, a 20% rate is still better than 40%.
Also, of course, the investor will retain full control over and access to the investment. Access and control are so often the two challenges to be overcome for IHT planning to work for an individual.
Subject to satisfaction of the investor’s requirements in relation to liquidity, risk and overall appropriateness these investments can continue represent an important part of an overall IHT planning strategy for individuals.
Tony Wickenden is managing director of Technical Connection
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