Terminology explained

Holding period

The holding period refers to the minimum time an asset must be retained to qualify for certain tax reliefs. Shares in Business Relief-qualifying companies, must be held for at least two years by the deceased before their death to be eligible for IHT relief.

Spousal Exemption

Spousal Exemption from Inheritance Tax (IHT) covers all transfers between spouses or civil partners, whether during lifetime or upon death, provided they are UK-domiciled or deemed domiciled. This exemption ensures no IHT is payable on these transfers.

Scenario background

Tom

Denise

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Tom and Denise are husband and wife.

They each own £200k of unlisted assets which potentially qualify for Business Relief (BR).

They hold assets in their estate that utilise Inheritance Tax (IHT) allowances and exemptions. Therefore the BR assets held would be liable to IHT at 40% in the absence of BR being available.

Tom dies within one year of owning his potentially BR assets and Denise dies one year later.

Scenario 1

• Tom dies leaving all of his potential BR assets to his children.
• Denise subsequently dies and leaves all her assets to her children.
• Tom dies having owned BR assets for one year.
• Denise dies one year later (owning BR assets for two years).

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Tom's Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

£80,000

Tom was not eligible for BR due to not satisfying the holding period to qualify for BR assets.

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Denise's Inheritance Tax (IHT) position

Asset:

£200k BR Assets

Tax Payable:

Nil

Denise is eligible for BR, due to owning her BR assets for two years.

Scenario 2

• Tom dies leaving all of his potential BR assets to Denise.
• Denise subsequently dies and leaves all her assets to her children.
• Tom dies having owned BR assets for one year.
• Denise dies one year later (owning BR assets for two years).

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Tom's Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

Nil

Tom was not eligible for BR, however the asset is fully exempt due to the Spousal Exemption.

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Denise's Inheritance Tax (IHT) position

Asset:

£400k of BR Assets

Tax Payable:

Nil

Denise is eligible for BR, due to owning her BR assets for two years. As well as recieving her husbands on death therefore inheriting his period of ownership, making up two years until her time of death.

Following the 2024 Autumn Budget

With BR-qualifying investments, investors' shares become eligible for 100% inheritance tax relief after just two years, as long as the shares are held at the time of death.

However, from April 2026 100% Business Relief will continue to apply to the first £1m of qualifying business and agricultural assets (in addition to the current nil rate band worth up to £500k per individual) and, there after, IHT will apply at half the normal rate, effectively reducing to 20%. This change will apply to unlisted inheritance tax solutions and private businesses that otherwise meet the Business Relief conditions.

For Business Relief qualifying companies listed on AIM, IHT will apply at the halved rate of 20% (irrespective of the size of investment).

Therefore, after April 2026, if Denise’s shares were held in listed AIM companies, her estate would be liable for £40,000 in scenario 1, and £80,000 in scenario 2.

Takeaway

The examples above show how the allocation of BR assets on death could reduce IHT exposure by 40% on first death.

In this example, a tax saving of £80,000 is achieved on a £200k investment, through the use of the Spousal Exemption in conjunction with retaining the unlisted BR assets.

Careful planning can therefore be beneficial from a tax perspective with regard to both the timing of the initial investment and retention of such assets.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Please note: The explanation of the 2024 Autumn budget changes is in accordance with our understanding of the law and our interpretation of it at the time of publication. The proposed reforms we will discuss have not yet been drafted in legislation; and are subject to change.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.