The Autumn Budget (2024) marked a significant shift in the tax landscape. One key change was the plan to bring unused pension pots into the value of an estate when an individual dies (after April 2027).
In short, many investors could soon face an inheritance tax (IHT) liability on their retirement savings. Previously, this was not the case. As a result, financial advisers are busy in 2024-25 trying to adjust clients’ estate plans.
Fortunately, there are still options available for investors. In particular, venture capital schemes like the Enterprise Investment Scheme (EIS) could provide opportunities for IHT savings upon death. In this article, we explain how.
We hope these insights are helpful. If you’d like to explore our pre-vetted EIS projects here at Bure Valley Group, please get in touch.
What has changed?
Before the Autumn Budget (2024), defined contribution pensions (pension “pots”) were not included in the value of an individual’s estate when they died. Rather, their beneficiaries could inherit unused funds with no tax liability.
This was unless the owner died after the age of 75. In which case, the beneficiary would need to add the inherited funds to their taxable earnings (i.e. for income tax purposes). For instance, a basic rate taxpayer would pay 20% on the funds – unless they were taken into a higher bracket.
However, from 6 April 2027, this will change. Unused pensions could face the standard IHT rate of 40% when the owner dies. Other tax planning measures will be required to try to keep the funds within the family.
How VC investing could help
The imminent change to pensions undoubtedly makes them less attractive for estate planning purposes. However, venture capital (VC) schemes could offer many investors an alternative.
On 6 April 2026, another change is expected to arrive – the arrival of the Individual Business Relief Allowance (IBRA). This will allow investors to claim 100% IHT relief on qualifying shares under £1 million. Above that threshold, 50% IHT relief will be available.
This IBRA will replace the current regime for Agricultural Property Relief (APR) and Business Relief. Before the Autumn Budget (2024), these provided 100% or 50% IHT relief on qualifying assets with no threshold.
As such, the IBRA is arguably a “step back” for investors and business owners looking to keep their wealth away from IHT. However, the new allowance could still be used to your advantage. Let’s see how.
Preparing for the IBRA
One interesting feature of the upcoming IBRA is that each UK taxpayer will be entitled to it. So, if you are married or in a civil partnership, both you and your spouse get your own £1 million IHT-free allowance for qualifying shares.
Please note that we understand that IBRA will not be transferrable. For instance, suppose John and Susan are married. They each own £500k in qualifying shares. After 7 April 2025, Susan dies, and the remainder of her IBRA allowance is lost. It would not go to John to give him a £1.5 million “combined” IBRA.
As such, investors interested in VC for IHT purposes should consider their tax planning options sooner rather than later. For instance, in the above example, John might consider giving some of his qualifying shares to Susan if he accumulates over £1 million before the 6 April 2026 deadline. This can be done with no capital gains tax (CGT) liability, and it would allow the shares to benefit from Susan’s remaining IBRA (assuming she has not crossed the £1 million threshold herself).
Important notes
On 6 April 2026, the upcoming IBRA regime will apply to the Enterprise Investment Scheme (EIS) and other VC schemes which previously fell under the outgoing Business Relief rules.
For an investor with £1 million in EIS shares, their EIS portfolio will be free from IHT, assuming no other qualifying shares have used up some/all of their IBRA. Above that threshold, an effective 20% IHT rate will apply (i.e. 50% of their standard 40% IHT rate).
Please note that AIM shares (alternative investment market) will not fall under the new IBRA allowance from April 2026. Rather, they will automatically face 50% IHT relief regardless of their value. As such, some investors may want to consider their options with a financial adviser.
For instance, certain investors with a high value of AIM shares may benefit from strategic asset disposals. From there, proceeds could be reinvested into qualifying shares under the imminent IBRA (e.g. EIS companies) to take advantage of the £1 million IHT-free allowance.
Invitation
By structuring your assets in an ideal manner, you could keep more of your hard-earned returns. However, tax planning and investing can be a highly complex area.
It is important to seek expert advice to ensure you navigate the changing tax rules in a prudent manner. Please note that many of the tax rules mentioned in this article are still subject to government consultation and could change further.
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