Triggering a chargeable lifetime transfer to reduce IHT? The UK inheritance tax (IHT) regime is changing, says Gerry Brown, trust and estate planning specialist at QB Partners.
From 6 April 2025 the basis of the tax will change from a domicile basis to a residence basis.
From 6 April 2026 agricultural property relief (APR) and business property relief (BPR) will be reformed. The current 100% rate of relief will continue for the first £1m of combined agricultural and business property, and a rate of 50% will apply to qualifying property in excess of that limit.
AIM shares (and other shares designated as “not listed” on a recognised stock exchange) – will qualify for BPR at a rate of 50% as opposed to the current 100%
From 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes
The ‘nil rate band’ (NRB) and ‘residence nil rate band’ (RNRB) are set to remain frozen for another two years.
In these circumstances it is essential to take full advantage of the various reliefs and exemptions still available.
One concern might be the availability of RNRB where a client has invested in AIM shares with the hope of getting 100% BPR – a hope dashed by the reduction in BPR from 6 April 2026.
If the estate of the first of the couple to die is worth more than £2m, tapering will reduce the amount of the unused RNRB in that estate. This in turn reduces the amount of residence nil rate band that is transferable to the surviving spouse or civil partner’s estate. For the purposes of determining the £2m limit BPR is ignored; the full value of the AIM holdings is included.
So can the shares be gifted (to family members) to reduce the estate? A gift is a disposal for capital gains tax (CGT) purposes so if the shares are standing at a gain there will be a CGT liability.
However CGT hold-over relief is available where assets are transferred to a trust and that transfer triggers an immediate charge to IHT.
The transfer must trigger an immediate charge to IHT – there is no requirement that IHT is actually payable (because of available nil rate band or available reliefs). Transfers to most trusts other than bare trusts – most likely discretionary or (less likely) interest in possession trusts will trigger an immediate charge to IHT.
The settlor can elect that the gain be held over. The trustees can pass the shares to beneficiaries and hold-over can again be claimed. This requires agreement of both trustees and recipient beneficiaries. The claims for hold-over relief must be in writing.
This route only offers CGT deferral; the beneficiaries will own shares and their base cost will be the settlor’s base cost (i.e. the purchase price). In the past the idea was that the beneficiaries would sell the shares over time using their CGT annual exemptions
This wasn’t difficult to manage when the beneficiaries had a CGT annual exemption of £12,300; it is more difficult to manage when the annual exemption is £3,000.
(It is also possible for the trustees to realise gains – using their ‘reduced’ annual exemption – but this can be cumbersome in practice.)
The trustees might receive dividend payments – the tax implications for the trustees (including self assessment) will need to be considered.
The beneficiaries will acquire the shares – for CGT purposes – at market value at the date of death and they will get IHT business relief (assuming the shares continue to qualify).
This approach is worth considering when the estate under review is valued at between £2m and £2.35m (£2.7m in the case of a married couple).
Where those limits are exceeded it might prove useful where the value of the AIM portfolio is such that its transfer will result in the estate value being reduced to the point where some RNRB becomes available. And in every case triggering a chargeable lifetime transfer if the client has a reasonable expectation of surviving seven years will result in the effective IHT rate on the AIM portfolio falling from 20% to 0%.
