Private wealth briefing - Budget changes

The first budget under the new Labour government, delivered by Rachel Reeves on 30 October 2024, contained a number of major changes of relevance to business owners and those with international interests.

Inheritance tax payable by business owners and farmers

Previously, trading businesses were eligible for 100% business property relief (BPR) from IHT. This meant that businesses could be passed down tax-free to successors (whether family or otherwise), and that business interests of any size could be transferred to lifetime trusts without incurring any IHT. The same was true for farms, for which 100% agricultural property relief (APR) was available on the agricultural value of farmland and assets.

The scope of both reliefs was significantly curtailed by the Budget. Readers will have seen the coverage of farmers’ protests in London, but this has overshadowed the wider application of these changes to every trading business in the UK.

The changes, taking effect on 6 April 2026, are as follows:

• BPR and APR now restricted to a combined £1m per person (not, surprisingly, transferable between spouses)
• Any excess value qualifying for BPR or APR is now subject to IHT at 20% on death.
• As with existing taxable business or land assets, IHT will be payable over ten annual instalments. This is likely to be less problematic for business owners than for farmers, whose combination of high capital values and low incomes means they are more likely to struggle to generate additional revenue to pay the tax.

In practice this means that, for all but the smallest family businesses, IHT now needs to be on the radar as a serious risk. There are several ways to mitigate this:

• Taking out IHT insurance to cover the potential tax cost on death.
• Transferring business interests to the next generation as potentially exempt transfers (and then insuring a seven-year run off period).

For trading businesses, transferring shares is likely to be cost-effective as no CGT will be payable provided holdover relief is claimed. This may not be suitable for every business, as much depends on succession plans.

Other changes to the scope of IHT (explained below) mean that, for some business owners, restructuring their companies and moving out of the UK may now be a realistic option in a way that it was not before.

Trusts

It is not yet clear how these changes will affect trusts. The Government included anti-forestalling measures so that any transfers into trusts set up on or after 30 October 2024 would be subject to a £1m cap on BPR/APR assets. Beyond that, the details of the interaction with trusts (including ongoing ten-yearly charges) are subject to a detailed consultation that has been trailed for ‘early 2025’. At the time of writing, no details have been released.

Business asset disposal relief (formerly Entrepreneurs' Relief)

The tax break given by BADR has been reduced. The rate applicable was 10% on the first £1m of lifetime qualifying gains (compared to a headline CGT rate of 24%); it will be increased to 14% from 6 April 2025, then to 18% on 6 April 2026. This brings it in line with the basic rate of CGT.

Scope of inheritance tax: Abolition of domicile

An individual’s liability to IHT has until now been determined by their domicile. Someone with a UK domicile, or a non-UK person who has become deemed domiciled, is subject to IHT on their worldwide assets. For non-domiciled people, IHT is applicable only their assets located in the UK.

For people leaving the UK and who had a UK common law domicile, it was notoriously hard to ‘shed’ that UK domicile in favour of a domicile in another country. The law surrounding it led to great uncertainty, not helped by HMRC’s approach in recent years of refusing to give advanced rulings on domicile questions.

With effect from 6 April 2025, the concept of domicile has been abolished. Liability to IHT will instead be determined by whether or not a person is a ‘long term resident’ (LTR). If a person has been UK resident (under the statutory residence test, in force since 2013) for ten years, then their worldwide assets are within the scope of IHT.

Once a person leaves the UK, they continue to be subject to IHT for a period of time depending on the length of their period of residence. Someone who has been in the UK for ten years has an IHT ‘tail’ for three years; someone who has been in the UK for 20 years has the maximum tail of ten years. For LTRs who spend between 10-20 years in the UK, there is a sliding scale.

What this means in practice is that, once any individual has been non-UK resident for a period of ten years, their non-UK assets will fall outside the scope of IHT. Their UK assets will remain subject to IHT. This offers both absolute clarity, and (for those willing to contemplate a long-term move overseas) the possibility of avoiding IHT on non-UK assets after ten years. For owners of UK businesses, it is possible – given the right advice, and working within certain parameters- for that business to remain operative in the UK but for the owners to move abroad.

Treatment of non-UK domiciled individuals

For non-UK people claiming non-domicile status while resident in the UK, it was formerly possible to shield non-UK income and gains from tax by claiming the ‘remittance basis’, which meant non-UK income and gains were taxable only if and to the extent that they were brought into (i.e. remitted) to the UK.

This system has been replaced with effect from 6 April 2025 with a new ‘foreign income and gains’ (FIG) scheme. 

For the first four years of UK residence, people from abroad can bring in any amount of income or gains tax-free. After that, they are fully subject to UK income tax and CGT on their worldwide income and gains (subject to double tax treaty relief).

For people claiming the status who have already been in the UK for more than four years when the new rules take effect, the Government are offering a temporary repatriation facility (TRF). The TRF is, as drafted, expected to run for three years (i.e. 2025/6, 2026/7 and 2027/8). For the first two years, non-UK income and gains already realised can be brought into the UK at the flat rate of 12%; in the third year, 15%. There have been suggestions in the press this week that the TRF may be extended but there is no detail as yet.

Treatment of excluded property trusts

For non-domiciles about to become UK deemed domiciled for IHT purposes (i.e. after 15 years’ UK residence under the pre-Budget rules), it was common practice to establish a non-UK trust into which non-UK assets were settled – an excluded property trust. Such assets remained outside the scope of IHT even if the settlor could benefit from the trust.

This tax break was of enormous importance to non-domiciles living in the UK. As of 6 April 2025, excluded property trusts will no longer benefit from this treatment. This means that, if the settlor (or their spouse) can benefit from the trust, the full value of the assets will be brought within the scope of IHT (i.e. be subject to IHT on the settlor’s death at 40%). This will apply to all excluded property trusts, including those established before the Budget.

On top of this, the full value of the trust’s assets for an LTR will be subject to the ‘standard’ ongoing charges of up to 6% applied every ten years and when assets leave the trust. Whether the settlor themselves is within scope will depend on whether they are an LTR (as outlined above). This may mean that trusts will have a change of IHT status if the settlor leaves the UK, which again may attract an exit charge.

It is this area that has been the subject of the most intense lobbying, but at the time of writing there is no sign that the Government may be willing to soften this treatment.

Pensions

The Budget also saw a change to the IHT treatment of pensions. Previously, pension pots unspent at death could be passed to nominated beneficiaries free of IHT. Those beneficiaries would then be subject to income tax on taking income from those funds.

As of 6 April 2027, however, any unspent pension on deaths after the age of 75 will be fully subject to IHT at 40%, and income tax will remain payable on withdrawals. The practicalities of this for pension providers are yet to be worked out, hence the two-year period before the change takes effect.