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Those affected will be individuals and trustees who currently own assets worth more than £1 million, which qualify for BPR or APR at 100 percent. This will include owners of private trading companies and UK agricultural property along with partners in a trading business.

The changes are also a boardroom issue for companies which qualify for 100 percent BPR. The board may need to consider how to fund IHT arising on a shareholder’s death as well as deal with the consequences of a potential change of ownership which the developments might precipitate.

Individuals and trusts will have a £1 million allowance on the combined value of assets which qualify for 100 percent BPR or 100 percent APR. (This is subject to anti-fragmentation proposals for some trusts, see below). Over and above the £1 million allowance, qualifying assets will only benefit from 50 percent relief. It is worth remembering that these will still be valuable reliefs even at a 50 percent rate, reducing the effective rate of IHT from 40 percent to 20 percent in most cases on qualifying assets.

For individuals, the £1 million allowance will be available in chronological order on potentially exempt transfers (PETs) (broadly, gifts to other individuals) made within seven years before the individual’s death, chargeable lifetime transfers (CLTs) (typically, gifts to a trust) and the individual’s estate on death. The allowance will refresh every seven years, meaning that those with assets of sufficient value might settle qualifying assets worth up to £1 million into a trust every seven years without IHT charge. It would of course be important to fully understand the other consequences of doing so and appropriate legal as well as tax advice should be taken.

It is concerning that the speed with which the changes are being introduced by the Government gives little time for the elderly and those in poor health to arrange their personal affairs. We have suggested an enhanced rate of IHT taper relief should apply during a transitional period to mitigate the effect of this.

We have also suggested alternatives to the proposed chronological application of the £1 million allowance, which in its current form devalues the allowance for taxpayers who gift relievable property between three and seven years before their death.

Unlike the IHT nil rate band and residence nil rate band, any unutilised amount of the £1 million allowance will not be capable of transfer to a surviving spouse or civil partner. The policy reason for this is unclear. It seems likely that the result, if the proposals proceed with the allowance being non-transferable, will be that some individuals will rewrite their wills (where necessary) to ensure that any unused allowance is not wasted, while those who do not seek advice are likely to be disadvantaged.

With the reduction of BPR and APR to 50 percent on values over the £1 million allowance, it will be necessary to establish the market value of qualifying assets at the time a potential IHT liability arises. Specialist valuation advice will be needed as there are many factors to consider in arriving at a valuation.

It would be helpful were HMRC to agree that a new valuation is not necessary on every occasion of potential IHT charge. Might, for example, a valuation be capable of use for a continuing period of at least 12 months? This would be particularly useful for trustees of affected trusts who will otherwise need to obtain multiple valuations each time property which qualifies for APR or BPR leaves a trust and/or on each 10-year anniversary. This will be an administrative and financially costly exercise and the burden of obtaining valuations will fall disproportionately on trusts/taxpayers who have assets worth around the level of the £1 million allowance, when compared to those with assets of greater worth.

We have encouraged HMRC to consider various issues that may arise for asset rich, cash poor individuals or trustees who find themselves or their estate having to pay previously unforeseen IHT liabilities on qualifying assets. Where this liability arises on valuable land or company shares, which the owner wishes to retain and/or hand down to future generations, realising cash to meet the tax (as well as additional valuation and advice costs) will have practical, commercial and tax implications.

The contained two ‘anti-fragmentation� proposals, which the Government intends will prevent individuals from reducing their total IHT exposure by transferring qualifying assets to more than one trust.

The first is that where an individual makes more than one trust, instead of each trust having its own £1 million allowance there will be one allowance allocated in chronological order to successive trusts (subject to transitional provisions). We have suggested that there should be a ‘reset� of this rule every seven years, consistent with the proposal that the £1 million allowance for individuals will refresh every seven years. This would go some way to relieving scenarios where the proposal could result in the benefit of the £1 million allowance being lost, for example where assets in a trust have been distributed to beneficiaries or sold.

The second proposal, to increase asset values used for calculating the IHT liability for trusts made by the same individual, was discussed in our earlier article. We have raised a concern that this proposal will, in various scenarios, result in valuations for IHT purposes which do not reflect the commercial reality. We have asked that the proposals be reconsidered for that reason.

We will have to await publication of HMRC’s response to the consultation and draft legislation to see what (if any) changes are made following the representations made by ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK and others. The Government has stated these will be published “later this yearâ€�.

What is clear is that those affected will need to ensure they fully understand the impact of the definitive version of the proposals, carefully consider the options available and have a plan for navigating this second notable change to the IHT regime in as many years. Please contact the authors or your usual ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK contact if you would like to discuss this.

For further information please contact:

• Paul Clark
• Liz Fothergill