The October 2024 budget (‘the Budget’) and how it may impact the drafting of the will of a shareholder in a non-quoted trading company (‘X Ltd’); a member of a trading partnership or a self-employed trader.
Setting the scene
The senior partner of a City law firm once said to his partners ‘we don’t run the firm for the 150 or so of us but for the 5,000 or so people who are dependent on the firm for their livelihood’. He was including within the 5,000 the children and spouses of his colleagues.
If X owns an interest in a trading business and in particular if it has employees, in considering X’s will and lasting power of attorney finance X should we suggest take steps to try and ensure that if X dies or ceases to have capacity; their owned trading asset(s) will continue as best they can without X meaning (amongst other things)
A) the livelihoods of their employees are secure; and
B) the capital wealth they have built up for their heirs is enjoyed.
The IHT position before the Budget for qualifying trading assets
Before the Budget (and up until 5th April 2026) if the owner of an interest described above in the title dies and there is no binding contract in place for the sale of their trading asset(s); its value as a general rule passes at a 0% rate of Inheritance Tax (IHT).
How the Budget changed things
From 6th April 2026 the above ceases to be the case once the value of the trading asset(s) included in the IHT estate of the deceased (‘X’) exceeds £1m. If it passes to X’s IHT qualifying surviving spouse/civil partner (‘spouse’) (broadly someone who has been UK tax resident for 10+ years or who has made the required IHT election so to be treated) it will be IHT exempt otherwise the excess: above £1m will incur IHT at 20% with such tax being due 6 months after the end of the month in which X dies. From 6th April 2025 interest is due to HMRC on any unpaid balance at 4% above the Bank of England base rate which is currently 4.5% meaning today interest of 8.5% would be due on unpaid IHT.
We are concerned that post 6th April 2026 funding this IHT due on X’s trading asset(s) (now within IHT in X’s estate) is likely to mean that
A) the administration of X’s estate will take longer to close in that the estate administration can only end once all estate debts including IHT due have been settled; and
B) X will need to be even more careful in their selection of executors as the liability to meet the IHT due will rest on them and they will also control X’s interest in each qualifying trading asset within X’s estate meaning, for example, they could vote their shareholding to appoint their representative(s) to the board of X Ltd and vote themselves dividends to help meet the IHT due.
After X’s death it will (as today) fall on the shoulders of X’s appointed executors to ensure there is no hiatus in the day to day running of the trading asset(s) in X’s estate and to do their best to ensure value(s) do not decline post X’s death. From 6th April 2026, a major difference to today is that X’s executors will need cash to fund the IHT due on X’s qualifying trading asset(s).
Typical pre-Budget planning in structuring X’s will
As X’s interest in their trading asset was assumed to pass at a 0% rate of IHT and on the assumption that post X’s death X’s interest in that asset would be sold, it was common for X’s will to leave their assets qualifying for 100% IHT business property relief to a discretionary trust created in the will so in due course
A) The sales proceeds would pass to the trustees of that will trust;
B) The sales proceeds would not be in the IHT estate of X’s surviving spouse at a likely IHT rate of 40% on that spouse’s death; albeit
C) During the surviving spouse’s lifetime s/he would be the important will trust beneficiary and also in all likelihood a trustee.
Post 5th April 2026, qualifying assets left to such a discretionary will trust will incur an IHT entry charge of 20% on the excess value above £1m compared to 0% today. We suggest such wills in place today need reviewing.
Post 5th April 2026 how might X’s estate fund the IHT due on qualifying assets within X’s estate?
There will be a number of options open to X’s executors. These may include (in no particular order) one or more of the following:
i) Other assets in X’s estate which are either liquid or can be realised being sold to help fund the IHT due;
ii) A sale of some or all of the qualifying trading assets);
iii) The proceeds of a life insurance policy ideally written in trust to pay out on X’s death being used to help finance the IHT due;
iv) The executors borrowings from a bank and/or a beneficiary; and/or
V) Their electing to pay some or all of the IHT due on the qualifying trading asset(s) by up to 10 annual (interest bearing) instalments.
Conclusion
A lot can be achieved by good advance legal planning. If we can be of help please get in touch. In the first instance please contact Robert Schon at rschon@streathers.co.uk or on 07749 051312
ROBERT SCHON PLANNING AND TAX ADVICE 