Summer Newsletter 2025

Exceptional circumstances

Our statutory residence test sets limits as to the number of days you can spend in the UK in a tax year without being resident here for tax purposes. The rules are complicated, with the daycount threshold dependent on a number of factors, including whether or not you have been UK-resident in any of the previous three years and, in some circumstances, the number of ‘ties’ (e.g. home, family) that you have with the UK.

When counting up the days that someone has spent here, you can exclude up to 60 days where they are here because of ‘exceptional circumstances’. This covers things like unexpected health issues (e.g. you are hospitalised following a bad heart attack, just before you were due to leave the UK) or the transport shutdowns during the pandemic.

An important point of clarification as to what constitutes exceptional circumstances has recently been given by the Court of Appeal. A woman claimed that the excess 5 days she spent in the UK were because of a moral obligation to care for her alcoholic and depressed sister, who had two young children. In allowing her appeal, the court said that an individual can be prevented from leaving the UK for various reasons, including a sufficiently compelling moral obligation. There is no requirement for departure to be a legal, physical or medical impossibility.

For the days to be excluded, the circumstances do not need to be rare within the context of human society as a whole; they merely need to be exceptional within the context of the individual’s own life. The statute clearly anticipates serious illness and death as potential exceptional circumstances.

To determine whether events experienced by an individual are exceptional, those circumstances must be looked at in the round. In particular, the moral or societal obligations that the illness of a relative (or any other situation) imposes on the individual form part of the overall circumstances; they can and should be taken into account in considering whether the circumstances, as a whole, qualify as exceptional.

Whether or not you are resident in the UK will have a massive impact on your income tax, CGT and (following the changes that took place on 6 April this year) IHT position.

Don’t leave anything to chance: if you are looking to emigrate, discuss your plans with us so that we can make sure you don’t inadvertently remain UK resident.

Inheritance Tax –
Changes for farmers and other trading businesses

Since 1992, farming and other unincorporated or unquoted trading businesses have benefitted from 100% agricultural property relief (APR) or 100% business property relief (BPR) when Inheritance Tax (IHT) charges would otherwise apply (e.g. on death of the owner or when such property is transferred into a trust). There is no cap on the value that qualifies. Note, however, that non-trading businesses (e.g. investment company shares or rental property) do not qualify for any relief at all.

Shares traded on the London Stock Exchange’s Alternative Investment Market (AIM) are regarded as unquoted for most tax purposes, including BPR. Thus, AIM shares in any qualifying trading company can qualify for 100% relief, too.

There are a number of conditions for the reliefs to apply, including that the transferor must normally have owned the property for a minimum of two years immediately before the transfer. For APR, this is extended to 7 years for those who do not farm the land themselves.

Following the October 2024 Budget announcement that, from 6 April 2026, these reliefs will be restricted, there has been a lot of complaint, particularly from the farming community, about the proposals.

On 27 February 2025, the Government published a consultation on the proposed changes and how they see them working in practice. Much of it concerns the complex tax rules of trusts (which we will not cover here), but some of the other key points are outlined below.

New £1m limit for 100% relief

For charges arising on or after 6 April 2026 , 100% relief for qualifying business and agricultural assets will continue for the first £1m of combined business and agricultural property, but only 50% relief will apply thereafter.

If the total of qualifying property to which the 100% relief could potentially apply comes to more than £1m, the new allowance will be split proportionately across the qualifying property. For example, if a deceased owned shares in a family trading company worth £1.5m and farmland worth £3.5m (a ratio of 3:7), the 100% allowance for the business property and the agricultural property will be £300,000 and £700,000 respectively.

AIM shares

The rate of BPR is reducing from 100% to 50% from the same date for shares quoted on the AIM and similar ‘unlisted’ markets of recognised stock exchanges. From 6 April 2026 onwards, no part of the value of such shares will attract relief at 100%.

AIM shares will not use up any part of the post-5 April 2026 £1m allowance outlined above.

Businesses owned by spouses

Unlike the IHT nil rate band (currently £325,000) and residence nil rate band (currently £175,000), the £1m allowance is not going to be transferable between spouses. Unless this changes before the new rules come in, spouses owning businesses jointly is likely to become more common.

Transfers affected

The new limits cover the following types of transfer made by individuals:

• transfers on death;
• lifetime gifts made to other individuals during the seven years prior to death, which become chargeable to IHT because the owner failed to live long enough after making the gift; and
• lifetime transfers where there is an immediate charge to IHT (e.g. when business or agricultural property is gifted into trust).

Example

On 15 March 2025, Peter gifts £3.2m of shares in an unquoted trading company to his daughter Anita. There will be no IHT on this gift if Peter survives 7 years.

Unfortunately, he dies on 11 October 2027 (i.e. about 2.5 years later). The gift therefore is subject to IHT. The chargeable event is the death, which occurs after 5 April 2026, so the new regime will apply. Thus, relief of 100% will only apply to the first £1m of the gift, with 50% relief being available on the remaining £2.2m of value transferred.

Unlike under the current regime, therefore, £1.1m of value will be chargeable to IHT. No changes in IHT rates have been announced, so the tax would be 40% of any of the £1.1m value above Peter’s available nil rate band at death.

Note that this example assumes that Anita still owns the shares at the date of Peter’s death; if not, no BPR would be available at all.

Instalment option

Inheritance tax is normally due 6 months from the end of the month of death (i.e. 1 May 2028 in the above example), although those dealing with the estate may need to pay it earlier in order to obtain a grant of probate, which enables them to start distributing the assets.

IHT on certain illiquid assets, such as land and buildings and some unquoted shares, can be paid in 10 equal annual instalments. In some cases (e.g. IHT on a residence), interest on the remaining outstanding balance is incurred each year under the instalment option. This can increase the total payments by almost 50% when late payment interest rates are high (they are currently 8.25% p.a.).

The good news is that the government has confirmed that, under the new regime, where any IHT arises on qualifying agricultural or business property:

• the instalment option will be available; and
• the instalments will be interest-free.

Thus, only if you miss a payment date will any interest be incurred.

Example

Fazal has owned qualifying shares in an unquoted trading company for many years. He dies on 15 August 2027, leaving them to his younger brother, Ian. The shares have a value of £1.6m.

He also leaves AIM shares worth £400,000 and non-business property valued at £850,000 to his sister, Anna.

The AIM shares qualify for BPR at the lower rate of 50%. They do not reduce the £1m allowance available for qualifying property attracting relief at the higher rate of 100%.

The full £1m allowance is therefore available to be set against the value of Fazal’s trading company shares. Since the value of the shares exceeds £1m, relief at the lower rate of 50% will apply to the excess value.

Chargeable estate

	£	£
Unquoted trading company shares		1,600,000
Less: BPR
- 100% x 1,000,000	1,000,000
- 50% x 600,000	300,000
		(1,300,000)
		300,000
AIM shares	400,000
Less: BPR 50% x 400k	(200,000)
		200,000
Other assets		850,000
Chargeable estate		1,350,000

Tax calculation

	£
On first 325,000 @ 0%	-
On next 1,025,000 @ 40%	410,000

• Fazal’s average estate rate is 410,000/1,350,000 x 100 = 30.3704%.
• The IHT attributable to the transfers of the unquoted trading company shares and the AIM shares is 30.3704% x (300,000 + 200,000) = £151,852.
• This can be paid by 10 equal annual instalments, starting on 1 March 2028.
• These instalments are interest-free if paid on the due date.
• The IHT attributable to the other assets (30.3704% x 850,000 = £258,148) is due in full on 1 March 2028.

Conclusion

If enacted in their current form, these IHT changes will impact any farming or trading business of significant value. You should make sure that your will is updated to take account of this new regime and also consider any steps that you might take to reduce potential liabilities, such as making lifetime gifts while you still have (hopefully) many years to live.

We are happy to discuss all these matters with you and to make sure you get the specialist advice you need.

A couple of updates

Mandatory payrolling of benefits

In the Spring 2025 Newsletter, we explained that it would become compulsory to report most benefits through the payroll under ‘Real-Time Information’ (RTI) from April 2026. The Government recently announced that this will be delayed a year until 6 April 2027, giving those running payrolls more time to prepare.

This reporting will be through the Full Payment Submission (FPS), which is filed each payday and notifies salary and deduction information to HMRC. The FPS will show the benefits, the tax and the employer’s Class 1A NICs due on the benefits.

HMRC expects that more data will need to be reported than currently, so will publish more information later in 2025 about the additional data items that will be added to the RTI reporting.

Note that there is still no date set for making the payrolling of accommodation and beneficial loan benefits mandatory.

Environmental and technical studies

In the Spring 2024 Newsletter, we mentioned a tax case where numerous pre-installation studies were carried out (costing £48m) to assess the best positioning for offshore wind turbines.

The company had included this expenditure, along with expenditure on the wind turbines themselves, as part of their qualifying expenditure for capital allowances. The Tax Upper Tribunal, though, decided that the expenditure on the surveys qualified for no tax relief at all. Its decision was based on earlier case law precedent and a strict interpretation of the relevant section in the legislation.

We commented at the time that the decision seemed to be contrary to the Government’s policy of encouraging renewable energy. Indeed, at the October 2024 Budget, it was announced that the Government would have a consultation on this issue, with a view to perhaps amending legislation to enable such studies to obtain tax relief.

The good news is that the Court of Appeal has overturned the decision, meaning that the expenditure on the surveys qualifies for capital allowances. It has decided that expenditure ‘… on the provision of plant or machinery’ encompasses the costs of design as well as installation. This extends to costs of studies that inform such installation or design, provided that the plant or machinery to which the expenditure relates is actually acquired or constructed (as was the case here).

Examples of the studies include those relating to landscape, seascape and visual assessment; ornithology and collision risk; noise; and telecoms and radar interference studies.

Subject to any appeal to the Supreme Court, this case has clarified that pre-installation surveys should normally be treated as part of the cost of the plant that is to be installed. Under current legislation, ‘full expensing’ would apply, meaning that the cost would be immediately deductible for corporation tax purposes.

If your business incurs similar costs before installing plant and machinery, they should now qualify for allowances. We can help clarify the position for you.