In the hunt for new sources of tax revenue, the Chancellor, Rachel Reeves, has sent wealth managers, financial planning firms and client advisers back to the drawing board to find alternative tax-saving vehicles for their clients.
In the process, she has deeply antagonised the nation’s farmers and millions of small business owners with a tax grab on the handing on of agricultural and business properties to the next generation. Were we living in France instead of Britain, doubtless tractors would be dumping steaming piles of ordure outside the gates of Westminster, such is the degree of anger in the agricultural community. As we go to press, a major farming protest in England and Wales, with tens of thousands raising their voices against the Chancellor, also threatens a wider dispute with farmers which could threaten domestic food production in the UK in 2025.
Setting aside for a moment the changes the Budget introduced to agricultural property relief and business property relief, the fact that Reeves has decreed that pension pots will, from April 2026, be deemed to be part of someone’s estate for tax purposes, is also huge.
Commenting on the change, Bob Langridge, a partner of the tax team at law firm Brodies LLP, and senior associate Stewart Gibson from the firm’s private client team, described the inheritance tax (IHT) changes as “the most significant for a generation”.
Gibson points out that for many years now pensions have been seen as an effective way of passing money down to the next generation.
Pensions became a favourite vehicle for the passing on of wealth once defined contribution (DC) pension schemes became the way most people saved for their old age. DC schemes became popular by default in the 1980s and 1990s when companies started winding up their final salary pension schemes for reasons that we do not need to go into here.
For those on significant salaries, there have long been two very clear incentives prompting the building up of a large pension pot. One, it meant the pot could withstand meaningful amounts being drawn down through one’s old age, and two, what remained in the pot could be passed down the generations free of IHT. From April 2027 that will no longer be the case.
Now that the Chancellor has, as it were, kicked that pot over, financial advisers are scrambling to find other ways forward for their clients. Gibson points out that it is still far too early to make firm pronouncements as to what that way forward might be.
“We are still waiting for the details on the Budget proposals to be fleshed out. The Government has said that it will be consulting on the pension proposals until this coming January. However, there have always been things that people can do to find efficient ways of minimising the tax burden for the next generation. The main thing we are telling everyone right now is to be sure to talk to their lawyers, accountants and tax advisers,” he comments.
Langridge states that until this Budget people had often included assets in their pension pots. The ‘grace period’ until April 2027 proposed by the Budget gives these folks the opportunity to consult with their advisers on whether or not to turn those assets into cash for drawdown.
“People now have a window of opportunity to speak to their advisers and decide the best course of action for them,” he comments.
Langridge notes that the changes will also impact a lot of investment houses, many of which offer some of their investment products as effective IHT wrappers.
“In particular, AIM portfolio shares historically have been sold as an IHT planning opportunity since they generally qualified for 100 per cent business property relief (BPR). Under the new proposals, they will only ever qualify for 50 per cent BPR and won’t benefit from the £1m allowance for full relief.
“This may need to be revisited as a tax-saving provision. Viable alternatives in a Scottish context would be investments in forestry or natural capital, such as restoring peatlands. Investments in commercial woodlands will remain a very tax-efficient vehicle and can qualify for 100 per cent BPR within the limits of the £1m cap the Budget proposes for BPR.
“If you own commercial woodlands, there is no capital gains tax (CGT) on the value of the outstanding timber. CGT is restricted to any increase in the value of the underlying land, which is normally a small fraction of the overall value of the forest,” he explains.
Gibson adds that another important provision that people need to take notice of is that the task of paying any IHT due on a pension pot, once it falls inside the estate of the deceased, falls to the pension scheme administrator.
“What this means is that people need to ensure that their pension death benefit nominations and their wills are up to date, along with any necessary power of attorney documentation. Of course, they also need to ensure that whatever documentation they have had drawn up is reflective of their current wishes,” he notes.
From the government’s perspective, the outrage among farmers is probably going to be something that needs to be addressed. Part of the problem is that because, until the Budget, agricultural land was not subject to IHT, buying land became a good IHT dodging wheeze for wealthy citizens. Farmers are incensed that they are being penalised unfairly, as they see it, when they try to pass the farm to the next generation, because of this IHT dodge.
As things now stand, the Budget will only exempt farms from IHT if the value of the farm is under £1m. Government policy, farmers argue, should find a way of distinguishing between real farmers and tax dodges for the wealthy. Actually, the cap applies to an individual, so a married couple could probably each claim the £1m APR. They could also claim their IHT nil rate bands, which could add a further £650,000 of relief. So it may be that farms worth considerably more than £1m could be passed to the next generation free of IHT. The details, as Gibson points out, have still to be finalised.
Westminster is arguing that only some 28 per cent of farmers will be affected by the IHT changes since their farms are valued at under £1m. However, the National Farmers’ Union president, Tom Bradshaw, argues that DEFRA figures show that the actual percentage of farms that will be affected is more of the order of 66 per cent.
Under BPR prior to the Budget, an estate could claim 100 per cent relief from IHT on qualifying business assets if the deceased had owned the assets for at least two years. Post the Budget, from April 2026, only the first £1m will enjoy 100 per cent IHT relief, the rest of the value of the business will only get 50 per cent relief, which is equivalent to an IHT rate of 20 per cent. This will annoy SME business owners about as much as the Budget’s proposed changes to agricultural property relief is angering the farming community.
