Individuals and trustees affected by these changes have several issues and options to consider. Some of these are mentioned below.
Individuals
These changes will, if individuals maintain the status quo, result in potentially higher IHT liabilities in the future. The first step is for individuals to understand the quantum of the potential liability and consider how that might be funded. As referred to above, if cash is required from a family or private company to help pay for the IHT arising, further tax implications can arise. Those affected should consider the tax costs of cash extraction and what the options may be.
In addition, individuals may wish to consider accelerating plans for lifetime gifting of assets, most commonly to the next generation or into trust for their potential benefit. Reducing the value of their estate in this way will decrease the individual’s IHT exposure on death if the gift is survived by more than seven years. There may be circumstances where a gift into trust, as opposed to an outright gift, might seem more appropriate. For example, individuals who are concerned by asset protection considerations, in the event of future relationship breakdown or financial distress of gift recipients, along with caution around making substantial wealth available to heirs at too young an age.
Where shares in a family or private business are concerned, the issue of who will control that business following any gift will also require consideration. Gifting to a trust may be a way of enabling the retention of control with the older generation as trustees whilst passing on economic value to the trust for the benefit of others.
Those contemplating gifting assets worth more than the available £1 million allowance to a trust will need to act before 6 April 2026 if the gift is not itself to trigger an IHT charge when it is made.
The capital gains tax (CGT) position on the making of any gift will need consideration, and the loss of the CGT-free uplift to market value on death of the donor factored into decisions. It will also be necessary to ensure that the gifted asset doesn’t inadvertently remain in the individual’s estate for IHT purposes under the ‘reservation of benefit’ rules or trigger an income tax liability under the ‘pre-owned assets’ rules.
Gifts to individuals can of course give rise to an IHT charge if the individual doesn’t survive for seven years following the gift. The transitional provisions will need to be factored in here, and term life insurance may be a cost-effective way of addressing any IHT risk.
Life insurance, more generally, to cover the IHT exposure on retained assets which will cease to qualify for 100 percent relief, is featuring frequently in our conversations with clients. Where this is considered appropriate and the assets in question are shares in a company, consideration will need to be given to who will pay the premium for the policy, as this can result in very different tax results.
Individuals should also review their wills to understand the impact the changes may have on the IHT liability of their estate as well as potentially the succession of their assets. It may be appropriate to execute either a new will or a codicil once any impact is understood.
Trustees
Trusts holding assets affected by the BPR and APR changes have different considerations.
Trustees might consider appointing assets out to beneficiaries and should review the ongoing terms of the trust after, for example, the death of a life tenant. As with gifts by individuals, it will be important to consider the CGT consequences of any actions taken as well as any resultant IHT liabilities, immediate or potential. Any contemplation of such payments will also need to consider the age of beneficiaries and any asset protection risks (as mentioned above).
Trustees (although this can also apply to individuals as referenced above) are often ‘asset-rich, cash-poor’. Their only asset might be shares in a trading company, which until now have not given rise to any IHT liabilities as they qualify for 100 percent BPR. Trustees will need to start thinking about the options available to them to fund future IHT liabilities, which may include extracting cash from the company if it has liquidity. The way in which such cash is made available to shareholders can significantly affect the tax liability on extraction and this will be an area on which trustees should take advice.
Please contact the authors or your usual KPMG in the UK contact if you would like to discuss what the forthcoming BPR and APR changes might mean for you.
