The Labour party won the recent general election with a huge landslide, giving them the largest majority since 1832. After a change of government, it’s natural to be concerned about how new financial policies could affect your wealth.
The incoming Labour government has plans to overhaul several tax rules that could affect you. For example, back in April 2024, they announced proposals to change the way that Inheritance Tax (IHT) is calculated.
Under the new rules, assets held in trusts overseas would now be subject to IHT. This could mean that certain families pay more tax in the future. The change in policy may add to worries about IHT, which has already been a key concern for many people in recent years.
This is because IHT receipts were already on the rise before Labour announced their plans. Indeed, according to Professional Adviser, the government raised a record-breaking £7.5 billion from IHT in the 2023/24 financial year.
Read on to learn why this is, and how the “Business Relief” exemption might help you and your family mitigate IHT.
Frozen “nil-rate brands” could mean that your family pays more IHT on your estate
Over the past few years, more families have paid IHT. In part, this is because the IHT “nil-rate bands” – the amount of wealth you can pass on to your beneficiaries when you die without triggering a tax charge – remain frozen.
In the 2024/25 financial year, you have a nil-rate band of £325,000. You may also benefit from an additional “residence nil-rate band” of £175,000 when passing your main home to a direct descendant such as a child or grandchild.
However, the nil-rate band hasn’t increased since 6 April 2009 and the residence nil-rate band hasn’t risen since 6 April 2020.
Prior to the general election, the Conservative government announced that the thresholds would remain at their current levels until at least 5 April 2028. Currently, the new government hasn’t announced plans to increase the thresholds.
Meanwhile, the value of your estate could rise as house prices increase. You might also generate growth on your savings and investments. Consequently, more of your estate could exceed the nil-rate bands, meaning your family pays more IHT when you die.
Your family could pay 40% Inheritance Tax on any wealth that exceeds the nil-rate bands
Typically, you’ll outline who you want to inherit your estate in your will. When you pass away, your executor gathers your assets, pays off any debts, and then calculates whether there is any IHT to pay before dividing up the estate.
To do this, they add up the total value of your taxable assets and then apply the nil-rate bands. Your family may pay 40% tax on any wealth that exceeds the thresholds.
Fortunately, there are several ways to mitigate IHT including lifetime gifting, the “gifts from income” rule, and trusts. Despite planned changes to IHT rules, these may be effective ways to reduce the tax that your family pays.
When considering ways to mitigate IHT, you may have overlooked “Business Relief”. This could be because you don’t understand how the rules work or assume that it only applies to business owners.
But in fact, you and your family could benefit from using Business Relief.
You may qualify for Business Relief of 50% to 100% on certain investments
The government first introduced Business Relief in the 1976 Finance Act. The primary aim was to protect small family-owned businesses in the event of a death.
Prior to the introduction of Business Relief, the beneficiaries of a business might have had to sell their shares to pay a large IHT bill. Business Relief makes certain shares and business assets exempt from IHT to prevent this situation.
This means your family could claim 100% Business Relief on:
- A business or interest in a business
- Shares in an unlisted company.
Additionally, they may be able to claim 50% Business Relief on:
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings, and equipment used by a business you controlled or were a partner in.
You don’t need to own a company to use Business Relief to mitigate IHT either.
Instead, you can potentially reduce the tax your family pays by increasing the proportion of your wealth that you hold in qualifying investments. That said, only certain investments qualify for Business Relief.
They include:
- Shares, including minority holdings, in an unquoted qualifying company
- Shares in a qualifying company listed on the Alternative Investment Market (AIM)
- An unincorporated qualifying trading business, including partnerships.
AIM investments could be especially beneficial as you can hold them in a Stocks and Shares ISA. Consequently, you don’t pay tax on the investments while you’re alive, and your family won’t pay IHT on them when you die either.
Bear in mind that certain businesses don’t benefit from Business Relief, including companies that are listed on a main stock exchange or deal in any of the following:
- Stocks and shares
- Property letting
- Securities
- Buildings
- Land
Further to this, you must hold investments for at least two years before they’re eligible for Business Relief – another important reason to plan ahead if you want to find ways to mitigate a large IHT bill.
When you pass away and the executor of your will administers your estate, they can apply for Business Relief on any relevant assets. This process can be very complex so they may benefit from professional guidance.
There are benefits and risks to consider when using Business Relief to mitigate Inheritance Tax
Business Relief has some key benefits for estate planning as it could reduce the size of your estate. However, it’s important that you’re also aware of the potential risks.
You could retain more of your wealth while you’re alive
People often gift wealth while they’re alive to reduce the size of their estate for IHT purposes. Yet, while lifetime gifting can be beneficial, it requires you to give away a portion of your wealth before you die. It can be difficult to get that money back if you find that you need it to fund your retirement or pay for care in later life, for example.
Conversely, when you use Business Relief, you keep the investments in your own name. That way, you can access the wealth if you need it, and still make those funds exempt from IHT.
Your wealth becomes exempt from Inheritance Tax in 2 years
Any lifetime gifts that exceed your gifting annual exemption (£3,000 in 2024/25) are usually only exempt from IHT seven years after you give them. If you die before the seven years is up, your family may still pay IHT on that wealth.
In comparison, you only need to hold a qualifying investment for two years before your family can claim Business Relief on it.
Your capital is at risk
Business Relief normally applies to companies that aren’t listed on a major stock exchange, and AIM investments are often growth businesses or startups. This means qualifying investments could be more prone to volatility than other shares and you could see losses in the future.
If you’re planning to pass wealth to your family, you might not want to adopt this level of risk. You may want to speak with a financial adviser to determine whether Business Relief is a suitable IHT mitigation strategy for you and your family.
Get in touch
If you want to explore ways to mitigate the IHT your family pays when you’re gone, we can advise you.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.