UK Autumn Budget 2024: Major IHT changes for UK Businesses

Autumn Budget 2024: Inheritance Tax Hike on UK Business Owners

Ruzwan Boota (Tax Director at I Will Solicitors Limited) delves deeper into a significant announcement in the Autumn Budget on 30 October that completely changes the status quo for business owners in the UK, and will likely drag many of them into having a significant exposure to Inheritance Tax (IHT) should they pass away after 6 April 2026.

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‍(I Will Solicitors Ltd is a wholly owned subsidiary of Wahed Inc. They provide Islamic Wills, Probate and Tax Advisory services). 

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After reflecting on the announcements in the Autumn Budget and trawling through the details in the policy documents, there is one announcement which I am worried will go unnoticed by many business owners, but could likely impact them and their families more than any other - and that is the change to IHT Business Relief.

The Chancellor announced that, effective from 6 April 2026, Business Relief will only be available at a rate of 100% on the first £1m of qualifying assets (e.g. shares in a trading business) and it will be restricted to 50% thereafter. 

On the face of it, it may not seem like a big change, but below is an example which sheds light on just how significant the impact could be.

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Let’s say that Mr Khan is the sole shareholder of his wholesale business which is worth £2m.

Historically, any qualifying business (essentially most trading businesses) would benefit from 100% Business Relief on death, therefore Mr Khan would not have to worry about IHT on the value of the shares in his business (regardless of its value), and his shares would then pass to his inheritors with no tax charge, and therefore no tax problem. 

However under the new provisions, if Mr Khan passes away post 6 April 2026, his shares in the business would be exposed to a £200,000 IHT charge - big problem!

Here is a breakdown of the calculation:

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Now whilst the amount of tax is already a blow to the inheritors, the pressing question is - how will the inheritors pay for it?!

Unless there is already significant cash within the estate to pay the IHT liability, they will essentially have four options:

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1. Sell (in whole or part) the shares in the business

‍If they sold the shares pre-death, there are likely to be significant tax charges (Capital Gains Tax (CGT) and IHT). In the above case for Mr Khan, the overall tax liability could be up to c.£1.09m, meaning an overall effective tax rate of c.54% on death! This would leave the inheritors with only c.£910k to split between them from the original £2m!

If they sold the shares immediately post-death, under the current provisions, there will likely be no CGT as there will be a tax-free uplift in the base cost of the shares post-death. Therefore the only tax liability will be the IHT liability of £200,000. This would leave the inheritors with £1.8m to split between them.

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2. Keep the business and use profits to pay the IHT liability

If the inheritors decide to continue operating the business and use company profits to pay the IHT liability, the tax implications increase significantly. Based on a company value of £2m, the total tax liabilities would be c.£440k (combination of IHT, Income Tax on dividend and Corporation Tax on profits). That means incurring a further £220k of tax in order to pay a £200k tax liability! 

Note too that if you are paying the IHT in instalments over a period of time, you will also need to factor in that HMRC have increased the interest rate on unpaid tax liabilities by 1.5 percentage points to Bank Rate plus 4 percentage points (currently the interest rate on IHT liabilities is 7.5%, so it will jump up further to 9%!).

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3. Sell other assets to fund the liability

If there are other assets in the estate (e.g. home, rental properties, etc), the inheritors could choose to sell those assets and use the net sale proceeds (after further tax potentially) to settle the IHT liability.

This could cause potential issues for the inheritors, and is not at all practical if the only other asset is the home which the surviving spouse is continuing to live in. 

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4. The inheritors take out a loan to pay the liability

Unless there is an asset (e.g. property) to take out the loan against, this will likely result in the inheritors taking out a conventional loan rather than a Shariah Compliant Loan and therefore getting into Riba (interest), which opens another can of worms! #WithdrawFromRiba

(Note that the effective tax rates mentioned above can change with the value of the business. If the value of the shares in the business is greater than the one used in the example, the effective tax rate will be higher).

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Significant impact for business owners

The above represents a significant change for business owners and their families, particularly those with a business worth over £1m. What many people have done for such a long time here in the UK is build family businesses that grow over time and then let it pass to the next generation tax free. This will likely change now as a result of these announcements. 

Why is the Government doing this? It seems that instead of letting people pass on businesses tax free to inheritors (and as a result, wait potentially a few generations before any CGT & IHT receipts on the value), they are pushing for the CGT and IHT receipts to arrive sooner into the Treasury, alongside higher dividend tax, corporation tax and interest receipts if the inheritors keep the business and pay the IHT liability over time.

There is a real lack of knowledge about IHT, and in some cases a real lack of action as people bury their heads in the sand hoping that the problem will go away. These changes announced in the Autumn Budget will only cause more problems for people going forward so it is vital (more than ever before) that business owners seek advice on IHT and their potential exposure and plan for succession so that it all doesn’t come as a surprise to family members after the death of a loved one. 

There are actions that can be taken to manage this impact, but they must be planned well in advance in order to get maximum benefit. 

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Want to discuss what actions you can take to navigate the changes?

If you would like to discuss planning opportunities in the wake of the Budget, we are offering free 30 minute meetings with Ruzwan Boota and Wahed’s Head of Private Clients Services UK, Abul Fazal Salahuddin. If you would like to book in a meeting, please do so using the following link:

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