Landowners and family businesses – impact of proposed IHT changes to lifetime gifts

The government’s proposed changes to the availability of business property relief and agricultural property relief will impact the inheritance tax (“IHT”) treatment of lifetime gifts made by landowners and family businesses. 

For those who had planned to retain ownership of businesses or agricultural property but under the new rules would be subject to IHT on their deaths, lifetime gifts will now be an increasingly important aspect of estate planning. 

This article looks at the practical implications of the proposed changes to lifetime gifts. 

For an in-depth look at what the consultation says, see our earlier summary.

The focus of this article is on what is changing. Do not forget that there are various other conditions that must be met to obtain business property relief or agricultural property relief – this article does not discuss these. 

General considerations 

This article focusses on the changing IHT rules about making lifetime gifts of relievable property. However there are also other considerations to be made when making a gift such as cashflow, control, estate planning, other IHT rules which have not changed (such as reservation of benefit), and capital gains tax (“CGT”) to name a few.  

For example when making a gift of shares in a family business have the articles been reviewed and updated and does there need to be a shareholders’ agreement? Who will be the directors of the company? For a partnership, has the agreement been reviewed to see if the voting rights, interests in revenue and capital, and payment terms for any retiring partners are still appropriate?

Have the recipients of the gift updated their Will and reviewed their own estate planning? Do pre-nuptial or post-nuptial agreements need to be put in place if the recipients are getting married or are already married?

Can you afford to give the asset away? How will you fund your retirement if you are no longer taking dividends from the business, receiving rent from the farmland, or taking a share of the partnership profits? Perhaps you can still continue to be employed by the business, but care should be taken so that you are paid a market rate for any work.

Can I still make a gift to an individual with the usual 7 year timer? 

Yes. The rules around making gifts outright to someone are not changing. So you can make a gift of relievable property, survive 7 years, and the value of that property will no longer be treated as part of your estate for IHT purposes. From the end of the third year after the gift, taper relief will apply to reduce the effective rate of IHT on any element of the value that would be subject to IHT (i.e. any value of the gift above your remaining £1million allowance that would only get 50% relief).  

In some circumstances the shadow for IHT can be longer than 7 years such as when a later gift into trust is within 7 years of death. So sometimes the period to review is up to 14 years. 

If I made a gift before the Budget in October 2024, does the new limited £1m allowance apply to that if I die within 7 years?

No. Gifts to individuals or transfers into trust made before 30 October 2024 are not impacted by the new allowance. The usual rules on any clawback of IHT if you die within 7 years would still apply though so the existing conditions for relief would be retested at that point. Generally these rules mean that if the recipient still owns the asset given and continues the trade, then there would be no IHT even if death is within 7 years of the gift.

If I make a gift now but before the new allowance comes in on 6 April 2026, does the new limited £1m allowance apply to that gift?

Yes it might. If you make a gift on or after 30 October 2024 but before 6 April 2026, then if you die before 6 April 2026 then the new allowance would not apply. 

If you make a gift on or after 30 October 2024 and if you died after 6 April 2026 and within 7 years of making the gift, then the new limited allowance would apply. If you die after 6 April 2026 but more than 7 years after the gift, then the property given away would no longer be treated as part of your estate for IHT purposes. 

These timings apply to both outright gifts and gifts into trust.

What about trusts? Can I transfer my property into a trust? 

Yes you can. When you do this will determine if the new allowance applies.  

As noted above, any IHT on transfers into trust before 30 October 2024 are not impacted by the new allowance. The potential entry charge was before the Budget and so the new limited allowance will not apply even if you die within 7 years of making the gift. 

If you transfer relievable property into a trust on or after 30 October 2024 but before 6 April 2026, then the allowance would still not apply to any entry charge. This means that there is a window before 6 April 2026, to transfer relievable assets into a trust without any IHT entry charge. However if you were to die from 6 April 2026 and within 7 years of the transfer to the trust, then on the consideration of any clawback of IHT on the gift, the new limited allowance would be relevant.  

If you make a transfer into a trust on or after 6 April 2026, then the limited allowance would apply to any IHT entry charge into that trust. You would be able to transfer up to £1million of fully relievable property with no IHT charge, but any value in excess of £1million would only get relief at a maximum of 50%, to give an effective 10% rate of IHT on assets going into trust (ignoring any nil rate bands).

These are the considerations for any IHT entry charge into a trust. It should be remembered that trusts you establish during your lifetime will have (although there are some exceptions) ongoing IHT charges too. These apply every 10 years of a trust’s existence as well as when any assets leave the trust. We will look at the impact of the changes to these trust IHT charges in a future article.

If I die within 7 years of a gift and IHT is due, who pays it?

The default position is that the recipient of the gift is liable for any IHT on a failed lifetime gift. However if they do not pay within 12 months of your death, then your executors take a secondary liability for this. 

So you will need to consider if the recipient can afford this. Do they have sufficient separate assets to pay any IHT? Will the asset itself produce sufficient income to fund the IHT or could it be sold or borrowed against? Remember that the changes coming in April 2026 mean that IHT on all relievable property can be paid by way of interest free instalments over 10 years which may help some make this affordable in cash flow terms.

If the recipient cannot fund this on their own or from the property given to them, then are they likely to receive any other assets from your estate on your death? If yes, then perhaps those assets could be used to help fund the IHT due on the failed gift. 

What about insurance? You (or the recipient of the gift) could take out insurance on your life to cover the risk of you dying within 7 years of making the gift. Gift insurance starts at a higher level but then decreases over time to reflect the benefit of taper relief if you died more than 3 years after the gift. For many, insurance is a cost effective approach to deal with this risk. Remember though that the policy should either be owned by the recipient of the gift (so it pays to them) or ideally held on trust for them (with flexibility to pay to them). Avoid the insurance being owned by you or paying to your estate as otherwise there could be IHT on that value too. 

So what should I do?

Historically the advice tended to be to hold onto relievable assets until death. On death they would get full relief from IHT and would also be rebased for CGT. However the decision to hold or give away is now more nuanced. 

For assets that are intended to stay in the family for many years and not be sold, the benefit of rebasing for CGT on death may be less important than getting the family business or land down to the next generation with minimal IHT. If you are ready to give the property away, can afford to do so, have considered the wider tax implications and issues of control, then now may be a good time to consider making gifts outright. 

For those for who wish to get on with a gift but the intended recipients are not old enough, or not ready to take on the responsibility, or you are not sure who should receive the assets, then a trust may still be a viable option. Trusts also allow gifts to be made with any CGT deferred. This may be particularly helpful for mixed businesses where a gift outright would trigger a CGT charge. For many this will mean considering settling these trusts before 6 April 2026 so as to benefit from the full relief from IHT on the way into the trust. However thought should be had as to the ongoing IHT charges in the trust and how they will be funded. 

Then for those who are not ready to give the assets away – either outright or into trust – it is important to consider how any IHT on your death would be funded should you die before you can make any gifts in the future. Could the business support the IHT over 10 year instalments? Is insurance needed? Are there separate assets you own that could be used to fund the IHT? Would the business be sold anyway? Could the business buy back its shares? Could some outlying and non-core land be sold? You should also check that your own estate planning is up to date including your Will (and more on that in a future article in this series). 

None of these are easy questions for family business owners and landowners, but they are important discussions to have. 

Burges Salmon has extensive experience advising family businesses and landowners. Our private wealth team can assist with tax advice, estate planning, family advice, corporate advice, and property advice. We are able to advise you on these issues as a whole or work alongside your existing advisors to guide you through what the options might be for your business or land ahead of the changes next April.
 

Historically the advice tended to be to hold onto relievable assets until death. On death they would get full relief from IHT and would also be rebased for CGT. However the decision to hold or give away is now more nuanced.