IHT advantage of companies buying from pension schemes

The issue
 
Until 5 April 2026 trading companies will generally benefit from a full inheritance tax (IHT) exemption due to the availability of Business Property Relief (BPR). From 6 April 2026 any value over £1m (on a person-by-person basis) will face an IHT liability of 20% (due to BPR only being available at 50%). Under either scenario ‘excess cash’ held in the company would be fully subject to IHT at 40%. There is therefore an IHT incentive to either demonstrate that such cash is not ‘excess’ because it has been earmarked for a business purpose, or alternatively the matter can be put beyond doubt by purchasing a business asset (such as business premises).
 
It is unrealistic to expect such companies to ‘magic up’ an asset purchase just for IHT purposes, but there are many cases where the property that a company operates from is held by a related pension scheme. For this reason, it may make sense for companies to consider using such excess cash to acquire property from the pension scheme.
 
Big IHT changes are also afoot for pension schemes. From 6 April 2027 pension schemes will be fully within the charge to IHT.
 
Example
 
Russ owns a successful toy manufacturing company (Big Ltd) which operates from Toy Towers which is a factory worth £2m owned by his pension scheme (as its only asset). Big Ltd is worth around £12m, of which £3m of this value is represented by excess cash.
 
If nothing is done here, then (ignoring IHT nil rate band):
 
1. IHT of £3.6m would be payable on Russ’s death after 5 April 2027. This is computed as 40% of £2m (the pension scheme) + 20% of £8m (BPR qualifying shares over £1m) + 40% of £3m (excess cash).
2. IHT of £2.8m would be payable on Russ’s death after 5 April 2026 but before 6 April 2027. This is computed as 20% of £8m (BPR qualifying shares over £1m) + 40% of £3m (excess cash).
3. IHT of £1.2m would be payable if Russ were to die now. This is computed as 40% of £3m (excess cash).
 
If £2,089,500 of excess cash was used to purchase the property (there would be £89,500 of SDLT) then this would reduce the IHT bill in all the above scenarios by £435,800 because the excess cash (on which IHT would be payable) would be reduced and the £2m property would attract 50% BPR.
 
WSM’s view
 
This kind of planning can make a lot of sense under different scenarios. Furthermore, if the property appreciates significantly, then IHT savings may increase due to the property attracting a level of IHT relief which would not be enjoyed within the pension scheme. This will also help scheme members extract cash from the fund whether as tax-free lump sums or taxable pensions. After 5 April 2027 a broad planning point is to extract pension funds and spend them, rather than leaving them to beneficiaries who will effectively suffer a double layer of IHT and income tax.