Inheritance Tax Planning Advice | Minerva Financial Planning

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Understanding Inheritance Tax

Inheritance Tax is levied at 40% on the value of an estate exceeding the tax-free threshold, known as the nil-rate band, which has been fixed at £325,000 since the 2009-2010 tax year. An additional Residence Nil-Rate Band (RNRB) of £175,000 is available when passing the family home to direct descendants, bringing the potential combined threshold to £500,000. These thresholds are set to remain unchanged until April 2028.

Recent Reforms to BPR and APR

In the Autumn Budget of 2024, significant reforms were announced affecting BPR and APR, effective from April 6, 2026:

Capping 100% Relief: Previously, qualifying business and agricultural properties could receive 100% relief from IHT. Under the new rules, this full relief is capped at £1 million of combined qualifying assets. Any value exceeding this threshold will receive relief at a reduced rate of 50%.
Reduction for Certain Shares: Shares not listed on recognized stock exchanges, such as those on the Alternative Investment Market (AIM), will see BPR reduced from 100% to 50%, irrespective of their value.

Implications of the Reforms

These changes have profound implications, particularly for asset-rich, cash-poor entities like family farms and businesses:

Increased Tax Liability: Estates with business or agricultural assets exceeding £1 million will face higher IHT bills due to the reduced relief on amounts above this threshold.
Financial Strain on Succession: Heirs may encounter financial challenges in sustaining operations or retaining ownership, potentially leading to the sale of assets to cover tax liabilities.
Impact on Family Businesses: Prominent family-owned enterprises, especially in Scotland, have expressed concerns that these reforms could hinder their ability to transfer ownership across generations without incurring substantial tax burdens.

Strategic Planning to Mitigate IHT

In light of these reforms, proactive and strategic planning is essential:

Asset Valuation and Structuring:

Regular Valuations: Obtain accurate valuations of business and agricultural assets to assess potential IHT liabilities.
Restructuring Ownership: Consider restructuring asset ownership, such as dividing property among family members, to maximize reliefs and minimize tax exposure.

Utilising Trusts:

Establishing Trusts: Placing assets into trusts can provide control over asset distribution and potentially reduce IHT liabilities, depending on the trust structure and timing.
Reviewing Existing Trusts: Evaluate current trust arrangements to ensure they align with the new regulations and continue to offer tax efficiencies.

Lifetime Gifting:

Gifting Assets: Transferring assets during your lifetime can reduce the value of your estate, potentially lowering IHT. However, it's crucial to consider the seven-year rule, where gifts may still be subject to IHT if the donor passes away within seven years of the gift.
Utilizing Annual Exemptions: Make use of annual gift allowances to gradually reduce your estate's value without incurring IHT.

Insurance Solutions:

Life Insurance Policies: Consider life insurance policies written in trust to cover potential IHT liabilities, ensuring that beneficiaries receive the intended inheritance without the burden of tax debts.

Diversification and Investment:

Diversifying Assets: Investing in assets that qualify for reliefs or exemptions can be a strategic approach to mitigate IHT.
Reviewing Investment Portfolios: Regularly assess investment portfolios to ensure alignment with tax planning objectives and adapt to legislative changes.

Professional Consultation:

Engaging Tax Advisors: Consulting with tax professionals can provide tailored strategies that consider the complexities of your estate and the evolving tax landscape.
Continuous Education: Stay informed about legislative changes and emerging planning opportunities to proactively adjust your strategies.

Conclusion

The recent reforms to Inheritance Tax reliefs underscore the importance of meticulous planning to safeguard your estate for future generations. By understanding the implications of these changes and implementing strategic measures, you can effectively navigate the complexities of IHT and ensure that your legacy is preserved in accordance with your wishes.

For expert guidance on Inheritance Tax Planning and to develop a strategy tailored to your unique circumstances.