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Navigating the UK’s Inheritance Tax Reforms: Essential Insights for Business Owners and Farmers

By February 7, 2025No Comments4 min read

The UK government has introduced major changes to inheritance tax (IHT), significantly impacting business owners, farmers, and pension holders. These reforms include:

  • A prolonged freeze on tax-free thresholds
  • Capped reliefs for business and agricultural assets
  • Pensions being subject to IHT for the first time

These changes will create new financial challenges for those looking to pass on wealth efficiently.

Key Inheritance Tax Reforms

1. Extended Freeze on Tax-Free Threshold

  • The nil-rate band (NRB) has remained at £325,000 since 2009 and is now frozen until 2030.
  • Originally set to rise with inflation, this freeze means more estates will fall under IHT as property and asset values increase.

2. Capped Relief on Business and Agricultural Assets

  • From April 2026, business and agricultural asset relief will be capped at £1 million.
  • Above £1 million, assets will qualify for only 50% relief, resulting in a 20% IHT liability on the excess.

3. Pensions Now Subject to IHT

  • From April 2027, pension savings will no longer be IHT-exempt.
  • Previously, pension funds could be passed on tax-free if the holder died before 75.
  • This change is projected to raise £1.46 billion for the government by 2029-30.

Implications for Business Owners and Farmers

1. Impact on Business Owners

  • Business Property Relief (BPR) has traditionally provided 100% IHT relief on qualifying business assets.
  • Under the new cap, assets over £1 million will face a 20% IHT liability.
  • Many families may need to sell shares or assets to cover the tax bill.

Example:

  • A £3 million business is passed down.
  • Under old rules, no IHT was due.
  • Under new rules:
    • £1 million is fully tax-free.
    • £2 million gets 50% relief, meaning £1 million is taxable at 40%.
    • IHT bill = £400,000.

💡 Strategic Advice: Consider trust structures or gradual share transfers to reduce IHT exposure.

2. Impact on Farmers and Agricultural Landowners

  • Agricultural Property Relief (APR) has also been capped at £1 million.
  • Assets above this will face a 20% IHT charge.
  • Many family farms may need to sell land or livestock to cover tax liabilities.

Example:

  • A farm worth £4 million is inherited.
  • Under current rules: No IHT.
  • Under new rules:
    • £1 million tax-free.
    • £3 million taxed at 50% relief → £1.5 million taxable at 40%.
    • IHT bill = £600,000.

💡 Strategic Advice: Farmers should explore succession planning tools, restructuring ownership, or setting up partnership arrangements.

Changes to Pensions and Their Consequences

  • Defined Contribution (DC) pensions will be subject to 40% IHT if left to beneficiaries.
  • This could discourage pension savings and drive individuals to seek alternative wealth preservation strategies.

Example:

  • A pension holder with £800,000 passes away at 68.
  • Under old rules: Tax-free inheritance.
  • Under new rules:
    • Full £800,000 subject to 40% IHT.
    • Tax bill = £320,000.

💡 Strategic Advice: Consider drawing down pensions earlier, investing in IHT-exempt assets, or using trusts to pass on wealth.

Final Thoughts & Next Steps

These inheritance tax reforms represent a major shift in UK wealth transfer laws. Business owners, farmers, and pension holders must act now to protect their assets.

💡 Key Takeaways:
✅ Business owners should explore trusts and phased succession.
✅ Farmers need estate planning strategies to reduce tax burdens.
✅ Pension holders must reassess their retirement and inheritance plans.

📌 Take Action Today: Given the complexity of these changes, professional financial planning is crucial. Contact Rock Corporate Services or speak to a tax advisor to ensure your wealth is structured tax-efficiently.

Sources & References

  1. Financial Times – “UK Inheritance Tax Reforms – Key Updates for 2024”
  2. UK Government Report – “Economic Crime and Corporate Transparency Act 2023”
  3. HMRC Tax Policy Updates – “Inheritance Tax Changes and Their Financial Impact”

Important Disclaimer

The information provided in this article is for general informational purposes only and does not constitute financial, investment, legal, tax, or other professional advice. It is not tailored to any specific individual’s circumstances and should not be relied upon as personal advice.

Before making any financial or tax-related decisions, we strongly recommend consulting with a qualified professional adviser.

For personalised guidance, please contact a Rock Corporate Services consultant.