Kevin Read considers some of the inheritance tax issues on the horizon for trading businesses and farmers.
The changes to agricultural property relief (APR) and business property relief (BPR) announced in the Autumn Budget 2024 by Rachel Reeves mean that, for the first time in over thirty years, some farms and other trading businesses will potentially come within the inheritance tax (IHT) net from 6 April 2026.
The details of the plans are still to be finalised and there is some talk that the proposed £1m cap for 100% relief may be raised significantly. However, the changes will have a big impact on some businesses.
In most cases, the IHT arising will be capable of being paid by instalments, although this option will sometimes incur interest charges (see below), which will themselves be significant. At current interest rates, the interest would be more than one-third of the total tax bill!
Paying IHT by instalments
Where the instalment option is available, the tax can be paid in ten annual instalments, commencing on the normal due date (which, for tax arising on death, is six months from the end of the month of death).
The assets that qualify for this option are:
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a business or interest in a business;
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all land and buildings (L&B);
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shares where the donor controls the company;
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unquoted shares where:
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tax on the shares is not less than 20% of the total tax due; or
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the market value of the shares exceeds £20k and the shares represent not less than 10% of issued share capital; or
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paying tax at the normal date would cause undue hardship.
Additionally, it must be IHT-related to any of the following:
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a chargeable lifetime transfer (CLT), where the recipient (e.g., trustees) pays the tax rather than the donor;
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death tax arising on:
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a death estate; or
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a CLT or potentially exempt transfer, where the donee either:
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retains the property until the donor dies; or
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retains the property until they die; or
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a 10-year charge on a trust.
Interest-bearing instalments
Interest will be payable on the instalments if the tax relates to:
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land and buildings (L&B), unless qualifying for APR (NB There is no such exclusion for L&B eligible for BPR);
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shares in an investment company; or
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shares in a property dealing company.
Note that interest will be chargeable on IHT arising on L&B used in a trading business, where the asset has not been covered by 100% BPR.
Interest is calculated on the amount of tax still outstanding each year; this is then paid at the following instalment date, as shown below.
Example: Fred’s executors use the instalment option
Fred died on 12 December 2024. His estate was £700,000, half of which related to a house and the rest to cash and quoted investments. He left everything to his niece and has a full nil-rate band available.
The total tax bill is (£700k-325k) at 40% = £150,000.
How much is payable on the first two instalment dates, assuming an interest rate of 8%?
The asset eligible for instalment option (the house) represents 50% of the estate value, so 50% of the tax (i.e., £75,000) can be paid via instalments. The other 50%, plus the first instalment (i.e., £82,500 in total) will be payable on 30 June 2025.
The amount payable on 30 June 2026 is £12,900, calculated as follows:
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instalment 2 (£7,500); plus
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interest on the previous year’s balance outstanding (£75k – 7.5k) at 8% = £5,400.
Practical tip
When choosing whether to use the instalment option, it is important to consider any interest that might be payable, especially with late payment interest rising to 4% above Bank of England base rate from 6 April 2025.
