Inheritance tax reliefs - what can be done ahead of the 2024 Autumn Budget

Lee Webster and Anthony Rice compare a lifetime gift of shares in an unquoted trading company to an individual and to a trust, as well as note how this subtle difference in planning can have a substantial impact on the final tax position.

A transfer of value to an individual is treated as a PET for inheritance tax. If the transferor dies within seven years of making the transfer, it gets factored into the calculation of inheritance tax payable on death. If they survive seven years, there is no inheritance tax to pay.

When the initial transfer qualifies for BPR, the ‘value transferred’ is reduced, by 100% in the case of unquoted shares. However, the relief will be withdrawn on death, unless:

• The shares are still held by the transferee, and
• They are not listed on a recognised stock exchange

This applies in relation to gifts of unquoted shares only. Additional conditions apply in respect of other business and agricultural property.

A transfer of value to a trust, and less commonly, certain other entities, is a CLT. Where chargeable amounts are transferred in excess of the available nil rate band, lifetime inheritance tax will be payable.

If the transferor dies within seven years of making the transfer, it is again considered along with the death estate. The withdrawal conditions are the same as those of a PET, but crucially, the relief is only withdrawn for purposes of calculating the ‘additional tax chargeable’ and does not impact the cumulative clock of the settlor. 

John made a gift of his 20% interest in Q Ltd (a BPR qualifying company) to his son, Paul, in November 2017. The ‘loss to donor’ was established to be £300,000. Paul sold the shares three years later, and John died in September 2023.

As Paul no longer holds the shares, the BPR is withdrawn for the purposes of assessing the tax due on the transfer. The value following withdrawal is what is included on his ‘cumulative clock’.

Assuming John had made no other lifetime transfers and ignoring all other exemptions and reliefs, the transfer would be covered by his available nil rate band. This would absorb what remains available for the death estate, potentially increasing the inheritance tax exposure by £120,000 (40% of the nil rate band utilised).

Taking the facts of the first scenario, but instead of giving the shares to Paul, he gives them to a discretionary trust and the trustees sell the shares prior to John’s death.

Again, the BPR is withdrawn for purposes of calculating any additional tax due on the lifetime transfer. The key difference here is that the withdrawal of relief does not impact the settlor’s cumulative clock. John will therefore have no inheritance tax due when the CLT is reassessed as it falls within his available nil rate band.

The nil rate band is retained in full for his death estate, as the transfer on his cumulative clock is that what was initially reduced by BPR.
This potentially realises a saving of £120,000 when compared to the position if the transfer was made as a PET.

The examples above illustrate how the choice of structure for a lifetime transfer can have a significant impact on the eventual inheritance tax position.

There are similar rules in place in respect of agricultural property and the application of agricultural property relief (APR) and BPR in respect of business property other than unquoted shares. In order to retain relief in all other scenarios, the property gifted must be qualifying business property at the time of death of the transferor.

This does not apply to gifts of unquoted shares. This can create planning opportunities in cases where it is known that an underlying business is soon to be sold, with potential to ‘bank’ relief with a transfer before turning the company into an investment vehicle. We considered the benefits of a Family Investment Company in a previous article.

There are certain ‘replacement property’ provisions that would allow Paul (in examples above) to reinvest his proceeds within three years of the original sale to avoid withdrawal of relief.

The current inheritance tax legislation brings a world of complexity to the application of APR and BPR. The examples above illustrate one of many scenarios where taking the right advice in advance can significantly change the tax position.

With all the uncertainty surrounding the future of valuable reliefs and current tax landscape, now could be the perfect time to consider succession planning with a view to utilising reliefs available, while bearing in mind how future changes in legislation that the new Government could implement might impact any planning undertaken now.

As with any tax planning, it is important to consider the bigger picture to ensure planning is commercially and practically sound and is effective for all purposes and all taxes. We provide tailored advice to our clients to ensure they achieve their desires and minimise tax exposure. If you would like us to review your inheritance tax position and ensure the maximum efficiency, please do contact us for an initial discussion.

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