Inheritance tax (IHT) changes announced in October will be coming into force this coming April. This will impact upon families owning businesses in the construction sector. Action could be taken now to minimise the impact on the next generation and on the business.
What is IHT?
IHT is a tax paid on death (and on some types of lifetime gifts), on the value of assets, at 40%.
Currently, some businesses enjoy a 0% rate of IHT. This business property relief (BPR) applies to businesses which are wholly or mainly trading, so for example construction businesses. Businesses which are wholly or mainly investing in land – buying land to hold on to without a plan for trade – do not qualify for the relief. Some planning can be done to maximise reliefs available.
How will the upcoming IHT changes impact business property relief?
From April 2026, only the first £1m of assets qualifying for BPR will enjoy a 0% rate of IHT. The rest in excess of £1m will be taxed at 20%. This is still a valuable relief as the tax rate is 20% and not the higher 40%. It is however a large tax increase from 0% currently, to 20% in April.
For example the £11m business will be taxed at 0% on the first £1m, and 20% on the excess of £10m. The IHT bill is £2m. This could be paid by ten equal annual instalments but that is £200k of extra tax leaving the business every year for ten years. The tax arises on a death, which cannot always be foreseen or planned for. The next generation taking on the business also has to find the money to pay this tax. If cash has to be extracted from the business, or assets sold, to fund IHT, that action may also suffer additional different taxes.
The £1m allowance can be doubled up if your spouse also holds £1m of BPR assets and if the wills do not leave such assets to the other spouse. Assets could be left in the will to a trust which the trustees can choose to benefit the spouse from.
Lifetime gifts to the next generation can move assets out of the IHT net. Affordability is key, as one cannot give an asset away and continue to enjoy it, and also save IHT. A 7 year period then has to be survived after the gift to remove it from the estate for IHT.
Moving assets to the next generation incurs the risk that they face claims on their share of the business if they divorce or get into financial difficulties. A trust may be a good vehicle to use to protect assets for the next generation. If assets over £1m are to be gifted to trust then that could be done before April up to an unlimited amount without triggering immediate IHT. After April the gift to trust can only be of £1m without triggering an immediate IHT bill, although that £1m allowance does refresh every 7 years.
Advice could be taken on life insurance to provide a fund to pay to a trust to meet the tax bill to ease cashflow.
Construction business owners, particularly those intending to pass the business to the next generation, should consider planning to minimise this extra tax burden.
For more information, please get in touch with one of our wills and estate planning experts.
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