June 27, 2025
Article
The October 2024 Budget saw a fundamental change to Inheritance Tax (IHT). Prior to the Budget, owners of trading business operated on the understanding that unlimited amounts of Business Property Relief (BPR) were available, irrespective of the size or value of the trading business. However, on 30 October Rachel Reeves announced that with effect from April 2026, taxpayers’ ability to claim BPR will be limited. Taxpayers will now only be able to claim BPR at 100% of the first £1 million of qualifying assets. Above this value only 50% BPR will be available.
As a consequence of this, owners of trading businesses are going to be faced with much larger IHT bills than previously has been the case. The increase will be more pronounced the greater the size of the trading business. An example of the impact is given in the scenario below.
What is also important to note is that this £1 million allowance is not transferrable between spouses. As such, for married couples (or individuals in a civil partnership) it is important that wills are prepared that are “tax efficient”. This will then ensure that each party to a marriage (or civil partnership) uses their £1 million allowance rather than it being wasted. An inefficient will (or simple mirror will) is now unlikely to be as tax efficient as it once was.
As a result of the above, clients are well advised to review their wills to ensure that they make best use of their £1 million allowance. A tax efficient will may well save the client £200,000 of tax in certain circumstances.
Moving forward with “IHT on the rise” then there is, by definition, going to be less assets available to distribute between beneficiaries. Individuals need to consider which family members are going to “suffer” this IHT increase. This is of utmost importance where an estate might be divided between family members, some of whom inherit the “trading business”, and some of whom inherit “other assets” and who is receiving the residuary of the estate. Again, it is really important that business owners carefully consider the structure of their will to ensure that disasters are avoided.
Of course, a will is something that does need to be reviewed periodically. Clients often think “it’s OK, I have a will” but forget that life-changing effects such as marriage or divorce can have a real impact on any previous wills. As such, there is a real need to take professional advice.
Example
Albert and Kate own a house worth £650,000. They also both own shares in their trading business worth £4,000,000 which qualify for BPR. They currently have simple mirror wills which leave their entire estate to each other on first death. On the second death the IHT position is as shown in the table below.
If you would like to discuss how the above could impact your IHT exposure, then please do not hesitate to get in touch with your usual point of contact.