IHT changes ahead – further options to reduce tax liability

The recent publication of the draft Finance Bill confirmed almost entirely what the Budget set out on reforms to the inheritance tax (IHT) regime for farming and business assets.

Nevertheless, there were some minor changes and omissions, which advisers highlight as opportunities for some farming families.

See also: IHT planning must include an all-round review of assets

There is now an eight-week technical consultation period on the draft Finance Bill. 

Accountants expect the impact of the reforms cutting agricultural property relief (APR) and business property relief (BPR) may lead to more farm and estate owners making use of other reliefs (see ‘Heritage property IHT exemptions’).

In the meantime, there is much more work for families and owners to do in terms of gathering documentation, valuations and other information to allow their options to be identified and an assessment of those options to be made.

“The tight timetable for changes to be made by the end of March in anticipation of the new IHT relief regime, will challenge all the professionals involved, especially where reorganising land ownership involves the revision of mortgages,” says Jeremy Moody, secretary and adviser to the Central Association of Agricultural Valuers.

Discounts on minority shares

The government previously had an intention to limit an individual’s ability to reduce their IHT liability by transferring assets (such as shares in a farming company or partnership) to a trust. Based on the draft Finance Bill, that appears to no longer be the case.

Tom Bradfield, a senior associate in law firm Burges Salmon’s tax, trusts and family team, says: “This is a technical point on what is known as the ‘related property rules’ and applies only in specific circumstances but it will mean a lot (in IHT liability terms) to
some people.”

Where an individual holds a minority share in a private farming company or partnership (that is, they do not have more than a 50% share and are therefore not in overall control of the business), the valuation of that share is likely to be discounted for IHT purposes.

For example, if someone owns a 25% share in a company or partnership, there is no open market for that share and even if a market existed, a buyer would be unlikely to pay a value representing the actual 25% worth, because they would not gain control of the business.

There is currently an option to reduce a majority share to a minority, for example, by transferring part of the majority share to a trust.

A 51% share could be divided to give a 2% share to a trust, so that the 51% share becomes a 49% share and may well attract the relevant and sometimes significant IHT discount. 

“Transferring a small portion of a majority share, as in the example above, to create two minority shares will mean that both minority shares will attract the IHT valuation discount,” says Tom.

“But remember that assets transferred to a trust must be managed for the benefit of the beneficiaries of that trust. That can work well in some cases – for example, where the beneficiaries are the very young children of the person transferring the assets – but will not be right for everyone.

“It’s easier to illustrate in a company situation but applies just as much to the valuation of partnership shares or even to jointly owned land,” he adds.

Majority shares might also receive a discount but at a far lower rate than minority shares.

Tom cautioned that valuations of shares in businesses are complicated and depend on things like the rights attached to different classes of shares, partnership voting rules, and so on. “Each case needs to be reviewed individually,” he says.

Interest-free instalments

The opportunity to pay IHT in interest-free instalments is being extended to all property qualifying for APR or BPR from 6 April 2026, which has not been the case thus far.

While only a simplification, this will be welcomed, says Tom, although it is expected that the interest-free offer will only be available if instalments are paid on time, as is currently the case.

In most current cases, interest is payable separately on each instalment from the date it becomes due.

Without this provision, which also applies to other business assets and certain shareholdings in unquoted companies, interest would be due on the full amount of tax from six months after the end of the month of death to the date of payment, with the rate on IHT payments currently at 8.25%.

However, Tom also points out that the interest-free instalment option falls away where the APR or BPR property is sold during the instalment period.

“In such situations the IHT will be immediately payable and interest charged from the day after the sale,” he says.

Heritage property IHT exemptions

Some farmers and landowners can gain full relief from IHT through the conditional exemption tax incentive, also known as heritage relief.

This covers some buildings, land, works of art and other objects which can be exempt from IHT and capital gains tax (CGT) when they pass to a new owner either on death or as a gift.

To qualify, the assets must be either:

• Buildings, estates or parklands of outstanding historical or architectural interest
• Land of outstanding natural beauty and spectacular views
• Land of outstanding scientific interest including special areas for the conservation of wildlife, plants and trees
• Objects with national scientific, historic or artistic interest, or due to a connection with historical buildings.

The new owner must agree to look after the item and make it available for the general public to view. Moveable assets must be kept in the UK.

If the owner does not keep to the agreement or sells the asset, the exemption is withdrawn and the IHT and CGT must be paid.

Whether an asset qualifies for conditional exemption is decided by HMRC on the advice of government heritage advisory agencies.

Claimants will be expected to complete a heritage management plan in accordance with agreed objectives.

It is also possible to transfer other suitable non-”heritage” assets to a maintenance fund free of CGT or IHT to provide income or capital for the maintenance, repair or preservation of the qualifying property and the provision of public access to it.

According to Natural England, one of the government’s heritage advisers, a claim for conditional exemption must normally be made within two years after the occasion giving rise to the tax charge, normally the death of the owner.

There is no claim form, but a claim must be sent to HMRC giving as much detail as possible about the property, including its ownership, location, and the proposed arrangements for public access.

HMRC will scrutinise this and seek any initial clarification from the owner.

Then it will ask the relevant agencies who advise it whether or not the property meets the standards required for conditional exemption from capital taxation and recommend draft undertakings, including reasonable public access.

Owners can charge a reasonable fee for access, with precise access conditions to be agreed with HMRC, but typically will be at least one month a year, as well as offering viewings by appointment, says accountant Saffery.