Inheritance Tax (“IHT”) basics
IHT is primarily a charge on the value of an individual’s estate on death. In outline:
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if you leave your estate to your surviving spouse or civil partner (or a charitable body) there is no IHT to pay: the transfer is “exempt” from IHT;
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but if you leave your estate to others e.g. children then IHT is charged on the value of your estate in excess of your available “nil rate bands”;
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the basic “nil rate band” is £325,000 but can be as much as £1m.
Janet & John example
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Suppose Janet and John are married. John dies and leaves everything – including his share of their jointly owned house worth £350,000 – to Janet. This is an “exempt” transfer for IHT.
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A few years later Janet dies and leaves everything to their children. The value of her estate on death is £1.25m.
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Janet would have (in effect) her own “nil rate band” of £325,000 + John’s “nil rate band” of £325,000 + her “residence nil rate band” of £175,000 + John’s “residence nil rate band” of £175,000 = £1m.
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Her estate of £1.25m less her “nil rate bands” of £1m = £250,000 on which IHT is payable at 40% = IHT of £100,000.
Particular types of property qualify for IHT reliefs – the current rules
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There are also various reliefs available which may reduce or even eliminate IHT. These reliefs include in particular “agricultural property relief” (“APR”) and “business property relief” (“BPR”). Subject to various conditions relief at either 100% or 50% may apply.
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Under current rules reliefs may apply regardless of the value of the property concerned.
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So suppose, in our Janet and John example above, Janet had also owned a farm valued at £10m and satisfied the various conditions required so as to qualify for 100% APR.
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In that case the IHT on her estate on death would still simply have been £100,000 as above: the value of the farm would have been wholly relieved for IHT.
The Chancellor’s Budget on 30 October 2024 – the rules from 6 April 2026
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As from 6 April 2026 the 100% rate of APR and BPR will only apply to the first £1 million of the combined value of agricultural and business property with a reduced rate of 50% applying to anything over £1m.
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Where there is both agricultural and business property the combined value of which exceeds £1 million the 100% rate will apply proportionately.
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The £1 million allowance will only apply to the value of property that currently qualifies for 100% relief. Property that qualifies for 50% relief under current rules will continue to qualify for 50% relief under the new rules and will not be affected by (or use up any of) the new £1 million allowance.
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In addition, the rate of relief for shares that are designated as “not listed” on the markets of recognised stock exchanges (such as AIM shares) will be reduced to 50% (from 100%) in all cases.
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As to such shares HMRC say (in their IHT Manual at IHTM18131 – “Stocks and shares: unlisted shares: what are unlisted shares?”):
“Where a company is listed on a market that does not meet the HMRC definition of ‘listed’, or is not listed on any market (for example, a family owned company), its shares and securities are classified as unlisted (or ‘unquoted’).”
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This new 50% relief for such shares will not be affected by – or use up any of – the new £1 million allowance.
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Subject to that, the current rules on which property qualifies for 50% relief and which for 100% relief will continue to apply.
Further detail
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Further detail about all this is given in the House of Commons Library Research Briefing Paper https://researchbriefings.files.parliament.uk/documents/CBP-10181/CBP-10181.pdf which includes comment about reactions both in Parliament and from various other bodies to the new rules – some supportive and some critical.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Laura Schiavone: email laura@mitchells-roberton.co.uk