financial-planning – ROBERT SCHON PLANNING AND TAX ADVICE

Inheritance Tax Changes Effective 6 April 2026: Key Considerations for APR and BPR Planning

The 2024 Autumn Budget introduced significant reforms to Inheritance Tax (IHT), particularly relating to Agricultural Property Relief (APR) and Business Property Relief (BPR). These changes, scheduled to take effect on 6 April 2026, represent a shift from the previously uncapped regime and could materially impact succession and estate planning.

This note highlights the main legislative developments and summarises planning opportunities discussed during a recent consultation with counsel. The client in question owns 100% of a trading company and is in his mid-70s; his spouse is approximately six years younger.

Background: APR/BPR Regime Pre-Budget 2024

Before the 2024 Autumn Budget, individuals owning qualifying assets could transfer them without significant IHT concerns, thanks to full APR/BPR relief. The new framework introduces caps and conditions that necessitate proactive planning.

Key Budget 2024 Announcements

Introduction of a £1 million Allowance
- A £1 million allowance will apply per individual to the combined value of property qualifying for 100% APR or BPR.
- After this threshold, qualifying assets will attract only 50% relief.

Clarifications from the Spring 2025 Consultation
- The £1 million allowance is not a lifetime limit. Like the nil-rate band, it refreshes every seven years.
- Lifetime gifts of qualifying assets will not use the allowance if the donor survives the gift by seven years.
- The allowance is not transferable between spouses or civil partners.
- Trusts receiving qualifying property will also enjoy a £1 million APR/BPR relief in calculating IHT on ten-year anniversaries or exit events.
- IHT due on APR/BPR assets may be paid in ten equal, interest-free annual instalments.

Note: Although the instalment option is welcome, the estate may need to pay income tax on any income received to fund the IHT payments, reducing the net amount available.

Planning Suggestions

Share Transfers Between Spouses
- A long-term UK-resident shareholder (‘A’) should consider gifting qualifying shares to their long-term UK-resident spouse/civil partner (‘B’).
- After two years of ownership, ‘B’ may transfer up to £1 million of shares into trust. This process can be repeated every seven years.
- ‘A’ can carry out the same strategy independently, allowing for effective use of both £1 million allowances.
Will Revisions
- Both spouses should revise their wills to provide for a transfer of up to £1 million of qualifying assets into a discretionary trust if they have not used their relief in the preceding seven years. This helps preserve unused APR/BPR allowances on death.
Company Qualification Review
- Several types of assets can qualify for BPR, including unquoted shares in a trading company.
- Relief is not available if the company is wholly or mainly engaged in:
  - Dealing in securities, stocks, or shares
  - Dealing in land or buildings
  - Making or holding investments
- It is advisable to review balance sheets and business activity to confirm BPR eligibility.
Gifts with Reservation of Benefit
- Lifetime gifts may trigger reservation of benefit rules, especially if the donor continues to receive income (e.g. director’s fees).
- With proper structuring, this should not impede implementation of the planning strategies.

Next Steps

If any of the matters above raise questions or merit further discussion, please feel free to get in touch.

Contact
Robert Schon
📧 rschon@streathers.co.uk
📞 07749 051312

The recent Budget and its impact on the Inheritance Tax (‘IHT’) spouse/civil partner exemption

In summary, we are aware that the new IHT regime effective from 6th April 2025 will have an impact on married couples/civil partners where one has been UK tax resident for 10 or more UK tax years and the other has been a UK tax resident for a lesser period. The consequence is that gifts/transfers of value in aggregate above £325,000 by the UK long term resident spouse/civil partner (‘spouse’) to their non-long term UK tax resident spouse will be within IHT and to avoid this consequence, the non-long term resident recipient spouse will need to make an IHT election to HMRC agreeing to bring their worldwide estate within IHT until they have lived for 10 consecutive UK tax years outside the UK.

The position before the October 2024 Budget

Transfers between spouses were exempt from IHT to an unlimited extent if both spouses were domiciled or non-domiciled in the UK. If, however, the recipient spouse was not UK domiciled and the transferor spouse was UK domiciled, the IHT exemption was limited to the amount of the IHT nil rate band which since 6th April 2013 has been £325,000.

Since July 2013, an election could be made to cause the non-UK domiciled recipient spouse to be deemed UK domiciled for IHT purposes, so that the full spouse exemption was secured at the price of the global estate of the non-domiciled recipient spouse being within the scope of IHT. Once made the IHT domicile election could not be revoked but ceased to have effect when the electing individual left the UK and was not UK tax resident for 4 consecutive tax years.

Failure to make this election could result for example in any outright gift by the UK domiciled spouse to their recipient non domiciled spouse being (amongst other things) an IHT gift with reservation meaning the IHT 7 year clock did not operate and the gifted asset was potentially in the IHT estate of both the donor UK domiciled spouse and the recipient non domiciled spouse and so potentially chargeable to IHT on the death of both spouses.

The change

Pre budget and to 5th April 2025 liability to IHT remains a domicile-based system. From 6th April 2025, a new residence-based system will be introduced. This will affect the scope of property brought into IHT for individuals and trusts once the individual/settlor has been UK tax resident for 10 or more UK tax years in that their global estate (including offshore trusts they may have created/funded) will be within IHT.

For individuals leaving the UK (whether they left pre or post 6th April 2025) those who have been UK tax resident for between 10 and 13 years will remain exposed to IHT for 3 years from the UK tax year in which they cease to be UK resident. An additional year is then added for each further year above 13 years spent as a UK tax resident up to a maximum of 20 years residence when the ‘tail’ within which the individual’s global estate remains within IHT will be 10 years post their ceasing to be UK tax resident. Thus, assumes they do not again become UK tax resident in that 10 year period.

The impact of the change on the IHT spouse exemption

From 6th April 2025, the above described IHT domicile election rules will be amended so that the spouse of a long-term resident who is not themselves a long-term resident (meaning they have not yet been a UK tax resident for 10+ UK tax years) can elect to be treated as an IHT long-term resident. The election once made by the spouse who is not a long-term UK resident will last until s/he has secured 10 consecutive UK tax years of non UK tax residence.

*NB failure to make the election will mean inter spousal gifts (especially from the UK long- term resident to the non-long term resident recipient spouse) are prima facie within IHT save for the 1st £325,000 of gifts/transfers.

An area of concern is for example X (a long-term UK tax resident spouse) generates the income/gains or can fund via an inheritance or parental gift the purchase of the family home which X transfers into joint names with their non-long term UK tax resident spouse who has not elected to HMRC to be treated as a long-term IHT UK tax resident. This is a gift by X to their spouse and if X dies before their spouse who remains unelected prima facie the value of the gift above £325,000 will be with IHT on X’s death at 40%.

IHT domicile elections made before 30th October 2024 (budget day) remain in place, with the spouse making the election treated as deemed UK domiciled to 5th April 2025 and then long-term resident from 6th April 2025 until 4 consecutive tax years of non-residence have elapsed. This election can also be made after 30th October 2024 and before 6th April 2025 with the electing spouse being treated as IHT deemed UK domiciled until 5th April 2025 and then a long-term resident from 6th April 2025 until 10 consecutive tax years of non-residence have elapsed.

If you may be affected by any of the above, please do not hesitate to get in touch. In the first instance please contact Robert Schon:

E: rschon@streathers.co.uk

T: 020 7267 5010

M: 07749 051312

October 2024 budget – impacts on drafting wills

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

A fringe sport

US citizen spouses/civil partners married to a non-US citizen and the ‘read-across’ for a UK domiciliary married to/in a civil partnership with a non-UK domiciliary

I recently met a school friend for coffee. Today he is a retired academic and lives in Scotland. His wife is a tax compliant US citizen (meaning she has annually filed tax returns to the IRS.) She has lived here 50+ years. During the conversation it transpired they are in the process of re-doing their wills. I found myself saying the following:

I think she needs to obtain US tax advice as my understanding is that there are strict limits on what a US citizen spouse can leave their non-US citizen spouse. Google research tells me it is $60,000 above which US estate tax is payable;

The way to avoid the above is for his wife’s will (if she pre-deceases him) to leave him her assets on what in the US is called a Q. Dot. trust. This stands for a ‘qualifying domestic trust.’ I said his wife will need US tax input but I think it means that:

The trustees must be US citizens; and
He can have a life interest in the Q. Dot [will] trust meaning for UK Inheritance Tax (‘IHT’) purposes, it qualifies for the UK IHT spouse exemption.

I suggested that their [Scottish] lawyers preparing their UK wills:

access US tax advice to confirm the above;
ask the relevant US professional to let them have a precedent for a Q. Dot. trust that can be included in her will; and
ask the said US tax professional to review the included Q. Dot trust to check it does the job.

Sadly, the story doesn’t end here. If my understanding of the Q. Dot structure is correct (that it requires the trustees to be US tax residents) I suggested that in preparing her will, they should receive answers to the following questions from the US and the UK

Should she and he own no assets jointly that pass automatically to the surviving spouse? Put another way should their house; joint bank accounts and joint investment accounts be held either as tenants in common or in sole names but not as joint tenants?
Will the Q. Dot trust be subject to US income tax and capital gains tax (‘CGT’) annually to 31^st December?
If yes—what UK compliance is required to avoid double taxation? NB the UK tax year ends on 5^th April;
If my friend (the surviving spouse non-US citizen) wants in his lifetime to receive trust capital from the Q. Dot trust – how is this taxed in the US? If taxed, what is his UK tax position? Does the US-UK estate and gift tax treaty assist; and if the distribution includes prior realised capital gains in the US tax resident trust-how does the UK tax such a distribution of ‘stockpiled gains’ from a CGT standpoint?
On his death, if the Q . Dot trust says the remaining trust capital passes to his and his wife’s two children (neither of whom are US citizens) – how will the US tax this distribution/the ending of the trust when money passes to a non-US citizen? How will the UK tax the same event? Might the US-UK estate and gift tax treaty assist? If the distribution includes prior realised ‘stockpiled’ capital gains in the US trust-how does the UK tax such a distribution from a CGT standpoint?
Should she want to consider renouncing her US citizenship in her lifetime and so ‘escape’ the above issues (if she died as a non US citizen, her will and assets would be outside the US tax regime save to the extent of her US situs estate). What is the US procedure for her to renounce her US citizenship? If she has to pay a US tax exit fee, is this creditable in the UK? What is the likely US tax cost for her to expatriate the US?

The ‘mischief’ the US is trying to protect itself against is a US citizen spouse (‘A’) leaving their wealth to a non US citizen spouse (‘B’) tax free with the result that on the death of B, no US taxes are due. The structure of the Q. Dot trust (it having US citizens as trustees) means that on the death of B the US Internal Revenue Service has a domestic US taxpayer within its compliance regime so all/any required US taxes can be paid/recovered.

We in the UK have a different but not dis-similar regime that applies when a UK domiciled spouse/civil-partner dies (or in their lifetime) transfers capital to a non-domiciled spouse/civil partner. Without advice/planning there is a real risk that UK taxes are due on such a transfer.

Where either assets are owned outside the UK or wealth is being given (in lifetime or on death) between spouses/civil partners who have different domiciles/citizenships; it is sensible to check the tax repercussions are understood and planned for in advance of any such gift/transfer.

If you have any questions-please contact Robert Schon 020 7267 5010 rschon@streathers.co.uk

Now might be a good time for the owner of a privately held trading company or business to think about making lifetime gifts of shares/an interest in the business.

One of the reasons I find tax law interesting is because in crafting the legislation, frequently those who design it identify areas where a carve out from the general rule is desirable. An example is in Inheritance Tax (‘IHT’) where to date if someone dies or makes a lifetime gift and their estate/the gift comprises of shares in an unquoted trading company or business, that asset (as a general rule) passes because of IHT business property relief (‘BPR’) at a zero percent charge to IHT.

If a lifetime gift and the donor dies within 7 years, two conditions need to be satisfied being:

The original property gifted has been owned by the gift recipient throughout, between the date of transfer and the donor’s death (or earlier the death of the gift recipient); and

The original property (or in certain cases replacement property) still is ‘relevant business property’ meaning it qualifies for 0% IHT treatment because of the BPR rules.

There are similar rules for qualifying agricultural assets.

The logic for this relief is because it would disadvantage UK plc if e.g., X, the sole owner of a trading business worth say £4m, died and their estate was within IHT and £1.6m of tax was due on their trading business asset.

In September 2023 the Institute of Fiscal Studies issued its Green Budget. Chapter 7 is entitled ‘Reforming IHT’. Its recommendations as regards IHT BPR say as follows:

5. There are several problems with the current design of inheritance taxation. Reliefs for agricultural and business assets and certain classes of share open up channels to avoid the tax and are consequently costly and inequitable and distort economic decisions. There is a clear case for eliminating the special treatment of all of these types of assets.

6. Abolishing agricultural and business reliefs could raise up to around £1.5 billion a year. How much revenue would be raised is uncertain and depends on various factors including whether other channels are used to avoid inheritance tax. Making these changes together would reduce the scope for substituting one avoidance channel for another.

7. Four-fifths of the tax revenue from reform to business relief could be captured just by capping the relief at £500,000 per person, rather than outright abolition. Most business wealth is concentrated among those with high wealth, so the fiscal cost of an additional half a million pounds threshold for business wealth would be low, though the special treatment would remain unfair and distortionary.Around 90% of business wealth bequeathed is given as part of an estate worth over £2 million.

The present IHT BPR regime has no cap on the value of qualifying assets on death or in lifetime that can pass at a 0% rate of IHT. The shelf-life of this present generous regime is unknown and therefore owners of qualifying trading assets may want to consider passing on e.g., to children or a family discretionary trust qualifying assets especially if the intention is for the business/trading operation to continue well into the future.

The main IHT anti-avoidance rule concerning gifts with reservation of benefit needs to be kept in mind by the donor. In its IHT tax manual HMRC says in the context of lifetime gifts of qualifying IHT BPR assets: ‘The continuation of existing reasonable commercial arrangements in the form of remuneration and other benefits for the donor’s services in a business entered into before the gift does not amount to a reservation provided the benefits are in no way linked to, or affected by, the gift.

What is ‘reasonable’ will depend on all the facts but, broadly, HMRC should test this by reference to what might reasonably be expected under arm’s length arrangements between unconnected parties.

If, however, as part of the overall transaction, including the gift, new remunerative arrangements are made, HMRC will need to examine all the facts to determine whether the new package amounts to a reservation ‘by contract or otherwise’.

In other words, the donor can continue to work in the business and be paid on an arm’s length basis.

Capital Gains Tax (‘CGT’) and ‘qualifying gifts’

The CGT legislation contains reliefs for gifts of business assets by allowing the gift recipient to assume the CGT base cost of the donor. This relief is called ‘hold-over’ relief. To qualify the asset gifted must fall within one of the following categories:

Is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by:The donor, or Their personal company or A member of a trading group of which the holding company is the donor’s personal company; and/or
Consist of shares or securities of a trading company, or of the holding company of a trading group, where: The shares or securities are not listed on a recognised stock exchange, or The trading company or holding company is the donor’s personal company.

A ‘personal company’ means a company in respect of which the donor can exercise at least 5% of the voting rights.

There is no knowing if a future administration might seek to amend the present IHT BPR rules. Should it want to, the IFS Green Budget gives it some cover. There is no guarantee that any future changes in IHT BPR rules will be avoided by making e.g. lifetime gifts now. What is I think non-contentious is that as a general rule, the UK does not make its changes in tax law retrospective.

Should you want to discuss anything raised in this note with someone from Streathers, please contact Robert Schon. Direct dial is 020 7267 5010 and email is rschon@streathers.co.uk