The freezing or reduction of tax allowances and exemptions in the Autumn Statement mean that the estates of many more people could become liable to pay inheritance tax.  

Inheritance tax is charged at 40% on the value of an estate over the current nil rate band – for an individual, currently, this is £325,000 plus the £175,000 residential nil rate band if applicable.  

But the inheritance tax nil rate band has been set at £325,000 per individual since 2009, and £650,000 for a married couple. When he was Chancellor of the Exchequer, Rishi Sunak extended the freeze until 2026, and the new Chancellor Jeremy Hunt has frozen the allowances further until April 2028. Originally intended to only affect the very rich and wealthy, house prices alone could see families who never thought inheritance tax was something they’d have to worry about, dragged into the inheritance tax trap – one in 42 homes in the UK are now valued at £1 million or more.  

The residential nil rate band of £175,000 can extend this to £500,000, or £1,000,000 for a married couple but this has also been frozen until April 2028.  

This can have a huge impact on families at risk of incurring an inheritance tax liability. 

Financial Consultant, Chris Milsom outlines a way to help mitigate inheritance tax payments in the light of the new taxation policies laid out in the Autumn Statement, through Business Relief. 

This relief was established to allow family firms to pass on their business through the generations without incurring large tax bills. However, it was extended to include any unquoted shares in a trading company, which allows it to be used in estate planning. 

This is how it works. 

Investments into a business relief-qualifying company becomes zero-rated for inheritance tax after two years. If held until death, they can be passed on free from a 40% inheritance tax charge. 

This time frame is in contrast to the inheritance tax exemption for gifts, which take seven years to pass out of the estate. This can make it a consideration for the very elderly who have not done as much estate planning as they might have wished, or for those who are in ill health. 

Another benefit of business relief is that the money, although out of the estate after two years, remains in the control of the investor. This mitigates a concern of many people, providing peace of mind, especially with the rise in inflation increasing living costs and as the government dithers around the cap to long term care costs. 

Business relief also fulfils its original function, enabling owners of a business (or those who hold a stake in one) to pass on their shares in the business free from inheritance tax – as long as the business activities meet the qualifying criteria for relief. 

This also applies if they sell some or all of the business – as long as within three years they invest some or all of the proceeds in another business relief-qualifying business. 

It can also be useful tool for people who have built up significant ISA investments over their lifetime. While free of income and capital gains tax, ISAs fall within a person’s estate for inheritance tax purposes. Transferring some or all of an existing ISA into one that’s invested in business relief-qualifying shares enables the investor to retain ISA tax benefits, as well as control of their money. Once they have held the new ISA for two years, it should be zero-rated for inheritance tax. 

For individuals potentially facing a large inheritance tax bill, business relief could be an option, bearing in mind the risks involved. 

If you’d like to know whether business relief is suitable for your circumstances, please contact us, here. 

As with most investments, capital is at risk and the value of a business relief-qualifying investment, and any income from it can fall as well as rise. Investors may not get back the full amount they invest. Business relief investments are typically made into companies which can be smaller or early-stage businesses. Hence the investments can be more volatile than, for example, companies listed on the main market of the London Stock Exchange. They may also be harder to sell. For these reasons, we would consider them high risk investments although the 40% IHT relief can serve to mitigate some of the risk. 

Also, the tax treatment depends on individual circumstances and that the companies invested in maintain their business relief-qualifying status. Tax rules could change in the future.