Navigating the new £1 million limit on Inheritance Tax Relief

The upcoming changes to business and agricultural property relief for inheritance tax throw up numerous complex and difficult issues for families wanting to pass on assets in a tax efficient manner. As a reminder, as of next April, broadly speaking, business and agricultural property relief for inheritance tax purposes is to be limited to £1,000,000 per individual. Any assets that would still qualify for the relief over this value will be subject to a 50% relief which equates to a 20% inheritance tax charge.

As I’ve been advising families about this since the announcement, a couple of things have sprung to mind which I think are going to impact both clients and HMRC. This could make the process of dealing with estate administration lengthier and more time consuming than is already the case.

When I was looking at an inheritance tax return the other day, as is usual practice, we submitted three years of annual partnership accounts to HMRC. HMRC normally look at these accounts to decide whether or not the partnership is trading, and provided it is trading, then business property relief would normally be allowed in full. When you claim the relief, you must put in a value for the deceased partners’ share and this would broadly be based on the capital account in the partnership accounts. Provided that the partnership is trading then HMRC do not seem to concern themselves too much with this value.

The thought occurred to me that they certainly will be concerned with this value when there is a 20% tax bill they can raise on the amount over £1 million. The second thought I had was whether or not they actually have the manpower to look at this effectively and turnaround any valuation queries in good time. Perhaps I am overly sceptical, but I’m not sure they will be entirely set up to deal with this process as effectively as my clients may wish them to be.

The other aspect to this, as we have consistently said to clients over the years, is that when estate planning, it takes a good team behind you to deliver results. So, from April, the accuracy of partnership accounts and land valuation will be even more important than they already are, meaning that the lawyers, accountants, and land agents must work together, in tandem, effectively.

These rule changes underscore the importance of early, careful planning. Even well-prepared estates could face added complexity and potential delays. Families may wish to review existing arrangements with their professional advisers and keep records and valuations up to date so that, when the time comes, the process is as smooth as possible. For some estates, it may also be worth revisiting partnership agreements or succession plans to confirm they still achieve the intended outcomes under the tighter relief rules.