STEP, the professional body for trust and estate practitioners, is urging the government to reconsider some of the proposals in the Finance Bill, which it says will disproportionately punish older business owners, put bereaved families at financial risk, and \u2018create chaos\u2019.<\/p>\n
The organisation warns that the proposed\u00a0reforms to\u00a0Agricultural Property Relief (APR) and Business Property Relief (BPR) will negatively impact smaller family businesses, farms, older business owners and their families.<\/p>\n
\u2018Younger owners will be able to take out insurance to cover the inheritance tax (IHT) bills or do lifetime planning\u2019, STEP said.<\/p>\n
\u201cThis is not an option for elderly\u00a0farmers and others\u00a0who are at serious risk of being hit by unexpected tax bills.\u201d<\/p>\n
Plans to tax unused defined contribution pension funds risk bringing delay and unfairness in the administration of even simple estates, STEP added.<\/p>\n
\u201cThe budget on 26 November presents\u00a0an opportunity for the government to show that it has heard the concerns from industry on technical complexities, and understands the need to take action.\u201d<\/p>\n
Under plans set to be introduced from April 2026, farms and family businesses will only receive full IHT relief on the first \u00a31 million of assets, with anything above this amount subject to a 20% tax charge. The \u00a31 million relief cannot be transferred between spouses, unlike other IHT allowances available on death. Under current provisions, no inheritance tax is due.<\/p>\n
Emma Chamberlain TEP, a barrister at Pump Court Chambers and spokesperson for STEP (pictured), explained:<\/p>\n
\u201cIf you are going to give the \u00a31 million allowance at all, then make it transferable. The nil rate band and the residential nil rate band were made transferable precisely to avoid the need for complex trust arrangements in wills. The lack of transferability here simply increases\u00a0unnecessary complexity that is\u00a0completely at odds with existing inheritance tax rules.\u00a0<\/p>\n
\u201cThe well advised and wealthy will be better able to amend their wills and avoid or mitigate the charge. Those whose spouse has already died or are unaware of the problem will find that in fact it is not \u00a31 million per spouse but \u00a31 million allowance per family \u2013 very different from the \u00a33 million that the government says can be passed on tax free. <\/p>\n
\u201cPassing on \u00a33 million tax free would only be possible with some quite complex planning. It would be better to be upfront with people about the true position. Younger people will be able to give away \u00a31 million tax free every seven years. This option will not be open to older tax payers.\u201d<\/p>\n
STEP is calling on the government to allow\u00a0spouses and civil partners to transfer their allowance in the same way as other main IHT reliefs and recommends, with the introduction of a transitional arrangement to help those over a certain age who make gifts before April 2026.<\/p>\n
\u2018The current rules would apply and there would be no clawback of relief even if they died within seven years\u2019, the organisation said.<\/p>\n
\u201cThis will help reduce the risk of older people being hit by tax bills that younger people will be able to plan for. Such a transitional relief will be similar to the one given to non doms in October 2024. In this case it would be limited only to gifts made before April 2026 for elderly business owners.\u201d<\/p>\n
Elderly farmers and business owners have previously been incentivised by government policy to do no lifetime planning and pass on property and assets on death, STEP pointed out.<\/p>\n
\u201cFor many, this meant not paying capital gains tax (CGT) or IHT. The change in government policy has been very unexpected. For those that are unwell, elderly and unlikely to survive seven years from any gift, they cannot make use of the existing lifetime reliefs.\u201d<\/p>\n
Under pension reforms proposed by the government in July \u2013 due to come into force in April 2027 \u2013 personal representatives (PRs), those legally responsible for gathering in the assets of estates and distributing to beneficiaries, would be held liable for inheritance tax on pension funds they do not control.<\/p>\n
\u2018This is an unwanted and unexpected change to the proposals in the original consultation in 2024 which, if it goes ahead, has the capacity to result in great unfairness\u2019, STEP said.<\/p>\n
The organisation warns if the Finance Bill isn\u2019t amended, families will be left struggling to find anyone willing to act as executor.<\/p>\n
\u2018If a professional does act as executor they will not want to distribute the estate for years in case new pension assets come to light on which they are personally liable to pay IHT\u2019, STEP explained.<\/p>\n
\u201cThe change will drive up professional indemnity insurance costs for advisors and therefore clients.\u201d<\/p>\n
Under the new rules, estates could be left undistributed for years as executors wait for valuations, pension fund details and HMRC decisions, STEP warned, leaving spouses, partners and children without access to funds from the estate while subject to 8% interest from HMRC on any unpaid inheritance tax six months from death.<\/p>\n
Chamberlain commented:<\/p>\n
\u201cSTEP, alongside other industry bodies, has serious concerns about how the proposals to charge inheritance tax on pensions are designed. There is no reason why the executors should have to pay IHT due on the pension fund from assets of the estate, such as the house or bank accounts, which may well pass to completely different people. If they have distributed the estate before the pension fund IHT liabilities have been settled, they are personally liable.\u201d<\/p>\n
STEP proposes a series of recommendations and safeguards to help reduce risks if the government\u2019s proposed changes come into effect, including giving executors proper protection from personal liability if a new pension fund emerges long after the estate has been distributed.<\/p>\n
\u2018Unless it is clear the pension fund passes to an exempt beneficiary such as a spouse or charity, the pension scheme administrators should also be required to keep 50% of the pension fund until directed otherwise by executors so that it can be used, if required, to pay IHT\u2019, STEP advised.<\/p>\n