Podcast – Navigating inheritance tax changes and succession planning

Welcome to the With You All the Way podcast, brought to you by Brachers providing legal support to families and businesses since 1895. Welcome to the navigating inheritance tax changes and succession planning episodes of All with You All the Way podcast. I’m Sarah Gaines. I’m a partner at precious, head of commercial property, and I’m joined here by my colleague Christopher Eriksson-Lee.

Hi, Sarah. Yeah, I’m, Chris Eriksson-Lee. I’m one of the partners here at Brachers to head up the private client team, at the firm, with a particular focus on the agricultural sector. And advising clients on succession planning and business structures and trusts and estate planning. So today, we’re here to talk about the changes introduced to inheritance tax by the labour government in the Autumn statement, in particular, the changes proposed to agricultural property relief and business property relief, and how these will impact our clients.

This is the first of a series of podcasts in which we will keep you up to date, as more information comes to light to help you navigate and mitigate the effects of these changes. Keep listening. To hear more from Chris, myself, and other members of the Brachers team, including experts from our family, corporate and other teams. We will provide you with the knowledge and strategies you need to manage these changes effectively.

So to the budget, what to a clients concerned about, what were they doing? Did we have any warning about these changes to APR and BPR? Yeah, it’s an interesting time, I think. There wasn’t any specific warning. I think the sort of our cultural community and business owners have been worried for a number of years about possible changes to inheritance tax, and in particular the reliefs, you know, that property relief and business property relief, and so many clients had sort of, you know, put in place strategies, around succession planning as part of their overall estate plans.

But I don’t think anyone actually thought that the changes were going to come about in the budget. And it was all a bit of a all, a bit of a shock and a surprise. It was interesting because I think there was more focus on capital gains tax and the possible changes that might, be made to the rates of capital gains tax.

And that was that was driving quite a lot of work for us in terms of gifting, disposals of land and property, business restructuring, and succession planning more generally. And so, there was a real sort of hiatus before the budget. Get those, get those deals, get get them over the line. Yeah. Pretty much, you know, so, yeah, that was, that was maybe I could say.

Yeah. The actual budget itself was a bit of a shock on the change to, to the agricultural property relief and business property relief. That sort of came about from that. So what do we know this point about the changes that are likely to come in for both the APR and BPR at the moment? There’s a, there’s a consultation, going on.

And the legislation hasn’t yet passed through Parliament. But in a nutshell, the changes are that, 100% are property relief and 100% business property relief will be limited to a threshold of 1 million pounds. And anything over that, will only achieve a 50%, relief. And so the effective rate of tax over 1 million pounds is 20%, on assets that qualify for those relief.

The rate of 20%, the rules are likely to be complicated because, because of their interaction with, trusts and also possibly of pensions as well. And also because of, the availability of allowances between family members and existing trusts and trusts that are created, after the October budget. And I think it’s also going to be complicated by virtue of the fact that the reliefs will have, an interaction with, gifting you.

So, for example, if you, if you made a gift before the, the October 2024 budget, will you still qualify for hundred percent relief if you die within the seven years of making that gift? And likewise, if you’ve made the gift after the October budget, you know, until within the seven year period after you’ve made that gift, will you still qualify for unspent relief or will it be 50% relief?

And I think the devil will be in the detail when the legislation goes through Parliament. You’ve mentioned about assets that might qualify for for relief. Well, what does that involve or what type of assets are we talking about here? So the on our listeners can understand how that’s going to impact them. Yeah. So the assets that so I suppose starting with our coast property relief assets that will qualify for relief for, assets that are used for agricultural purposes.

So the, the, the criteria for qualification for the relief, won’t it things change. But it’s really the, the rates of the actual relief that the, the thing that the budget has brought into focus and similarly with business property relief, the qualifying criteria, won’t change, but it’s, it’s the rates that are the critical thing. And, I suppose it’s the, the impacts that, that, will have potentially on, you know, how people look to fund the tax if they can’t, put in place plans to try to avoid it?

But it’s also going to I think, focus people’s attention on, trying to put in place appropriate plans to try to avoid the tax, in the first place. So think a lot of people are going to want to seek advice, about getting, you know, a good plan sort of put in place that’s early stage, to avoid the any, any UK tax tax at all.

So is that what clients are asking you at the moment? I mean what is their pressing concern. Is it what do we do. When do we do it. How do we do it? Who’s it going to involve. Yeah, certainly I think at the moment a lot of clients are think about gifting. I think a lot of clients are thinking about, trying to pass assets, you know, are you fab with that sense trusts or to the next generation?

They’re looking to sort of fragment ownership within families. The difficulty from our perspective as advisors is that because the legislation hasn’t yet gone through Parliament, which pins down the precise, nature of the rules, the advice from us at the moment is a bit of a wait and see. I wait and see sort of thing.

But, you know, certainly consideration of business structures and, you know, and gifting is, is, is, is is important. The other sort of aspect to this is a state where people have already passed away, you know, and the opportunities that might arise in connection with the use of oil trusts. It’s a bit hard, but, agricultural assets or business assets, to potentially help with maximize being, 100% that thresholds and allowances that are available for agriculture, property relief and business property relief.

And so we’re seeing a lot of people, considering deeds of variation and the use of trusts and wells, as a means of a, say, hovering, offering those types of assets. So, so if somebody has died recently, maybe before or just immediately after the budget. Is it possible to make the changes to their will at that stage?

Is it not fixed on their death? You you’re talking about sort of varying the terms of their wills after they’ve died to try to mitigate the tax. Is that right? Yeah. Well, it’s not necessarily to mitigate that immediately, but I think, you say, for example, one of the one of the things that we’ve been looking at is, you know, if the husband or wife leaves everything that they’ve got to their surviving spouse, is that the most tax efficient thing, you know, if they’ve got agricultural assets or business assets?

And so, one of the things that we been considering is whether it would be better for them to vary what they were going to inherit so that it goes into a different structure, to enhance relief. So the longer term, and yeah, you can do that, you know, still miss both state variation within two years since death to redirect property, away from the original beneficiary and either into a trust or onto perhaps the next generation or subsequent generation of the family as a means of longer term tax planning.

So, that kind of thing is quite prevalent to the moment is in quite sharp focus because of these changes and the impact that they might have. And you can only do that two years, up to two years after the death. Yeah. So you can do that within two years of someone’s death. In order for it to be written back for inheritance tax purposes, and to the person.

So, so there’s still things that people can do. Still people, still things that, people can do. You know, in terms of sort of post death, tax planning with these of variation and trusts, and consideration of gifting and existing business structures, as a means of maximizing, the application of reliefs. Yeah. So you mentioned earlier about, the fact that obviously we don’t know what the legislation is going to be at the moment.

But it’s it’s probably important for our listeners just to be thinking about different options, going forward, once that legislation has been finalized and you mentioned different business structures, gifting, putting assets into trust, fragmenting assets into other, other family members. Is it worth just touching on some of those, just to explain in a little bit more detail what that actually means?

I mean, not not everybody is familiar with trusts and maybe hasn’t used a trust before. The sort of idea, I suppose, is really that each individual has, you know, a 1 million pounds, allowance to achieve 1% of property, lethal business, property relief. Then there might be an opportunity to fragment ownership, between sort of different family members to achieve multiple 1 million pounds allowances between the wider family, to circumvent a charge to inheritance tax over the assets held.

There are some opportunities for that fragmentation to include a trust. So trust is is an arrangement. Where the trustees hold particular assets for named beneficiaries. And so, a trust in some ways has its own sort of legal and tax identity. A lot depends on when the trust was created and how the trust was created as to whether it will get a, a 1 million pounds, allowance for the relief.

The fragmentation issue is, is relevant, I think. Yes. Yeah. A trust has set separate identity to an individual in most cases, which may mean that the inheritance tax allowance, is able to be, you know, shared, and increased. But when one of the issues with the proposed rules is that if someone creates a trust after the date of the budget, then they will share that their share their inheritance tax across property relief and business property relief allowance with the with the trust that they’ve created.

But, people may have created trusts before the budget, which could come into play and be used in relevance, which would help. Or they might have created trusts, through their wills, you know, if someone’s passed away or they might look to retrospectively create trusts. Three wills using data variation. Again, to sort of help with maximizing the allowances available within the family.

Great. If it is still quite a worrying time, isn’t it? If if we’re talking about fragmentation, especially fragmentation of a business effectively. Well, that business is still trading and you want to still trade. I mean, it’s once, once those gifts, whether it’s a gift into a trust or a gift to other family members, have been made, that’s quite final.

So it’s it’s quite a. Yeah. And they’re all and there are all kinds of other considerations that go around gifting. So yeah, you could, you could take the view that it’s a bit unfortunate really, that you, those in the agricultural community and business owners are being forced into a position where they’re having to perhaps make, you know, gifts earlier than they might otherwise have done.

You know, one of one of the key considerations around making any gift is, you know, just not just the tax, but, you know, how is it going to play out in terms of the the person that you gift it to and receiving it? And, you know, where they can do it, you know, and that’s the whole sort of loss of income perspective from the donors side of things because, it’s not a gift.

If you then retain a benefit. Yeah. You can’t, you can’t, you can’t, you can’t, you know, derive and then come back from it. So once you’ve gifted something you can I said, you know, detach yourself from it. But also, you know, if the beneficiary of the gift, you know, goes through a divorce, you know, or falls into financial difficulty or, decides that they want to dispose of that, you know, assets have to realize value from it, you know, is that is that really what it was sort of intended in the first place?

Those are all things that need to be considered before jumping into making a gift just to try and help a tax position. So yeah, there’s there’s lots to think about, but just purely from a tax perspective, yeah, gifting and fragmentation is certainly something that people ought to be considering. So what sorts of things are we waiting for clarification on from, from the government to be able to take this forward to the next stage?

So I think that there’s quite a lot around the, the, the detailed rules on, the, the interaction of trusts, which is reasonably complicated. I think that’s based around the interaction with pensions. There’s this around the interaction between, you know, really between husband and wives and how that will work. So there’s quite a bit that’s unknown at the moment.

And without the rules, you know, there’s there’s no complete certainty. So hopefully the rules will be published later this year and the picture become clearer. And, you know, people will then be able to undertake their planning with greater clarity on what the rules are and how they’re going to how they’re going to work. The difficulty at the moment is that if you put in place a plan, that plan might come slightly unstuck in light of what the rules might say, as much in the, as my my published.

Do you think there would be an advantage for our listeners at the moment, though, maybe just to take a, a for want of a better word, at maybe an audit of of where they are at the moment, where the assets sit, what structures they’ve got available to them, either from, as you mentioned, about, trusts that that may have been set up already through deceased’s estate.

What family members are, are they’re interested in the business at the moment and taking it forward, who might be coming of age in the next couple of years and may continue in the business. And, and how those assets are made up, whether they are, you know, you know, diversity of, you know, the farming sector is is, you know, it’s a it’s not even a buzzword anymore, is it?

It’s it’s a sort of a past tense. But, you know, so many of our clients are not just farming the land. They’ve got the holiday lets the office lets the warehouse, lets and solar panels and things like that. Is it worth them taking stock and evaluating what assets they’ve got, where they held, and what opportunities could be available to them in preparation of this?

These changes, once they’re clarified, so that effectively, I suppose they can hit the ground running and know going into it as once the legislation has been finalized and that’s like they can come ready. Yeah. I mean, I think it’s definitely worth knowing what what you’ve got and how your existing ownership is structured and how your existing business structures, you know, the structures.

I’ve been doing quite a bit of work with, with clients at the moment, just on on brainstorming. Ways in which they might look to restructure and tax plan without actually sort of implementing proposals. And I think, you know, working in conjunction with, conjunction with, you know, your accountants, it’s going to be really, really important on that front as well.

So just, you know, floating ideas at the moment is a is a good thing. And coming in, sort of assessing perhaps what, you know, what you’ve got and what might be able to be done, you know, in the future it’s worthwhile. So as you say, you can hit the ground running when the rules are published and, and it will become clearer.

I mean, as a property lawyer, that’s the one thing that that comes to mind is that, you know, unfortunately, a lot of farms are carrying a lot of debt on their assets as well, aren’t they? Whether they’re land land based debts or bricks and mortar with the commercial properties and things like that. And obviously gifting land that is is laden with debt is not necessarily going to to help the situation.

No, it’s a bit more challenging that if there’s if there’s land which is indebted, that the hope is that it would already be within a business structure, that would allow for even a, you know, the interest in a partnership or the shares, a in a company to be gifted or disposed of, without affecting the indebtedness.

That might be that might be in place. And there are, you know, there are ways means that you can sort of do that within business structures. But equally, there are many landowners, I suppose, and business owners that either operate as sole traders or, you know, just as, you know, owner owners of owners of assets in their personal capacity without having a business wrapped around them.

Where that would be, you know, harder to deal with, as a consequence. So, but again, you know, that there might be other ways in terms of business structuring that, people will be able to, give themselves the opportunity to implement, you know, future gifting plans or, tax plans by creating businesses and, and, and restructuring and reorganizing the ownership of those.

So, again, I think that that’s worth looking at. I’m worth giving some thought to for people, in consideration of the changes that are coming about. So in summary, then, what we’re saying is that, at the moment, it’s, it’s too early to to say really as to what what our listeners will be able to do until we have the detail, through the legislation later on in the year, but that there are options available to them.

It’s worth maybe doing a personal audit now of what assets you hold. What assets have passed to you from maybe those that have died within sort of the last two years or up to two years, looking at the plans for the business in the future and who might be part of the business going forward, what family members or trusted, partners you’ve got, to work with going forward?

And then maybe to, to start to think about getting some preliminary advice from a lawyer, accountants, maybe the land agents looking at, the banks as well, if there’s if there’s borrowing that needs to be taken into consideration to have some sort of full planning that we can take forward once the legislation has been finalized. Yeah, I think that’s right.

I think, yeah, it’s a bit of preliminary planning. If you’ve not already done that, is going to be helpful. You know, because that will then allow, you know, full of plans to be, you know, put in place once, once. It’s all, once it all becomes clear, and if others don’t have a will at the moment, you know, there’s not to.

Yeah. I mean, I think there’s just sort of not having a will and also sort of, you know, the need to review existing wells. I think that the new rules will invariably mean that the type of world planning that plays in our culture sector, and also business owners might already have in place, will need some careful consideration because they might well have included sort of structures within within their wills, which aren’t quite as appropriate as they were before the, before the, before the budget.

And yeah, certainly if, if someone doesn’t have a want to so then yeah, definitely the time to let’s try and get something in place because I think now more than ever, Wells are going to be a really important tool in, in tax planning, to optimize, you know, reliefs and allowances. Yeah. Particularly for those now coaches that are in business owners.

Oh, great. Chris, that’s, that’s really helpful. And you know, it will sit with bated breath, as we usually do with new legislation that that’s, that’s coming. So thank you for joining us today. We hope you found informative and helpful. Remember this is just the beginning of our series. We’ll be back with more episodes to keep you up to date on the latest developments and provide you with practical advice.

In the meantime, keep your eye on our LinkedIn page for insights and updates regarding future episodes. We’ll be sharing key takeaways and additional resources there. And if you have any questions or you need personalized advice, don’t hesitate to visit our website or get in touch with our team. We are here to help you navigate these changes and plan effectively for the future.