Landowners and family businesses – impact of proposed IHT changes to trustees

The government’s proposed changes to the availability of business property relief (BPR) and agricultural property relief (APR) will impact the inheritance tax (IHT) treatment of trusts that own agricultural land and family businesses. This article looks at some of the practical implications of the policy for trustees. For an in-depth look at what the consultation says, see our earlier summary.

Help, this article looks long and complicated! 

The existing IHT treatment of trusts is already complex and these changes add an additional layer. This article works through some of the key changes. 

You may wish to start by looking at our summary document of the changes for trustees. This will help you consider in broad terms the issues you may be facing as well as the advice you will need in the coming months. 

What is changing for trustees owning agricultural land and business property?

It depends on the type of trust. 

Qualifying life interest trusts 

Some property held on trust is treated for IHT purposes as owned by the beneficiary. The most common example of this is a life interest trust created by a Will at any time or created during someone’s lifetime before 2006. 

For a qualifying life interest trust of this kind, the beneficiary’s allowance for full APR and BPR will be apportioned across their personal assets as well as those assets held on trust for them.

For example, if someone dies with their individual allowance of £1million full relief available, if they have £1million of relievable assets in their personal estate, and £2million of assets held on qualifying life interest trusts for them, their £1million allowance would be split 1/3 to their personal estate (relieving the first £333,333 but leaving around £666,666 only obtaining relief at 50%), and 2/3 to the property held on qualifying life interest trust for them (relieving the first £666,666 leaving £1,333,333 only obtaining relief at 50%). 

Relevant property trusts 

The other main type of trusts are relevant property trusts – i.e. trusts that are subject to 10 year anniversary charges and exit charges. These trusts will be treated differently. 

In the same way that individuals will have an allowance, trustees of this type of trust will also have an allowance for 100% relief for APR and BPR. That allowance will be separate from any beneficiaries’ individual allowance or the allowance of the person who establishes the trust.

Broadly the position where there is no APR or BPR is that there are charges of up to 6% every 10 years for the anniversary charge and then a proportionate charge of around 0.6% for each year between 10 year anniversaries and when property is transferred outright from a trust. 

Under the current rules, if any of the property owned by the relevant property trust obtains APR or BPR, then on a 10 year anniversary or an exit, up to 100% relief from IHT is available. So potentially an effective IHT rate of 0%.

Under the new rules, the availability of relief at 100% will be limited. Instead 100% relief will only be available on the value of relievable assets within the trustees’ remaining allowance. Anything in excess will have relief capped at 50%. 

That means for any value in excess of the trustees’ cap, the usual rates for trust IHT will be halved so up to 3% charge for a 10 year anniversary and a proportionate amount of around 0.3% for each year between anniversaries for exit charges.

For trusts holding lower value relievable property, this may make relatively little difference to the overall IHT. However for trusts holding higher value relievable property such that the proportion getting 50% relief is greater than the proportion still getting 100% relief, the proposals will make a material difference to the ongoing IHT charges payable by trustees.

For some landowning or business owning trusts, there will now be an IHT charge every 10 years or when assets leave the trust whereas before there would have been no IHT charge at all. 

The trust’s allowance for full relief will refresh every 10 years, immediately after a 10 year anniversary. 

Relevant property trust example

• Take a trust with a full £1million allowance. 
• In the sixth year of the trust’s existence, £750,000 of relievable property is transferred from the trust outright to a beneficiary. 
• The trustees claim relief on that full value at the rate of 100%. If no property then leaves the trust and the first 10 year anniversary of the trust comes round, there will be another IHT point but the trustees will only have £250,000 of their allowance remaining. 
• So the trustees can claim full IHT relief on the first £250,000 of relievable assets but any remainder would only get relief of 50%. 
• Immediately following that 10 year charge, the trustees’ relief allowance will refresh and the trustees will begin again with £1million allowance for the following 10 years. 

What APR and BPR allowance will trustees have?

It depends when the trust was created and when the IHT event occurs.

For trusts created before 30 October 2024 with qualifying APR and BPR property, the trustees will have a £1million allowance. 

For trusts created on or after 30 October 2024, each person creating a trust will have £1million overall of “trust allowance” which will be apportioned to all trusts they create with relievable property on a chronological basis. 

For example, if in 2027 Ms B transfers £800,000 of relievable property to a trust, that trust will have a £800,000 allowance for full relief. If later Ms B transfers an additional £700,000 of relievable property onto trust, that trust will only get £200,000 of full relief (£1million less the £800,000 attributed to the first trust). That allowance of £200,000 will then be the cap on relief for any exit charges and 10 year anniversary charges (as reduced by exits in the preceding 10 years) for that trust. 

If Ms B created two trusts on the same day consisting of relievable property, then any remaining trust allowance of Ms B would be apportioned between those two trusts.

Consultation responses to HMRC have noted the peculiarity of this approach and some of the current uncertainties. For example, what happens if a trust did not own any relievable property but then the trustees purchase relievable property? What happens if a trust comes to an end; can the allowance be used elsewhere? 

When will the IHT rules for trusts change? 

HMRC’s consultation document has a helpful table at the end that summarises the key dates.

For qualifying life interest trusts, the changes will apply from 6 April 2026. So if a life tenant of such a trust dies before 6 April 2026, then the existing rules apply and there is no cap to the availability of APR or BPR. From 6 April 2026, the person’s available allowance will apply proportionally across their own assets and those held on trust for them (see example above).

For relevant property trusts, when the rules apply is more complicated. 

• For trusts that existed before the Budget on 30 October 2024, the allowance will apply from the first 10 year anniversary of the trust after 6 April 2026. So the new rules will apply to that anniversary charge and then all subsequent exit charges and anniversary charges. Any exits before that trigger 10 year anniversary will not be subject to the new rules and not reduce the allowance available on that first 10 year anniversary post-5 April 2026. 

So if a trust was created on 15 October 2024, the next 10 year anniversary will not be until mid-October 2034. The trustees will not be subject to the new allowance for nearly 8 years after they come in on 6 April 2026. For trusts created April 2016 onwards, their next 10 year anniversary could be very soon after 6 April 2026 and they will therefore be subject to the new allowance much sooner. 

• For trusts created on or after 30 October 2024, the new rules will not apply to any exit charges before April 2026 and any exits before then will not reduce the allowance available at the next 10 year anniversary. While this might seem like a concession in the proposed rules, as the minimum period of ownership for agricultural or business property is a minimum of 2 years, we cannot see how relief could be claimed anyway. We suspect this is an error in the consultation document. 
• For trusts created 30 October 2024 onwards with exits after 6 April 2026, the new rules will apply and exits will reduce the available reliefs available at the next 10 year anniversary. 
• For any trust created after 30 October 2024, the first anniversary charge will be after 6 April 2026 and therefore that first anniversary charge will be subject to the allowance.

One of the main takeaways of the proposals is that for pre-Budget trusts, there is a window until the trust’s next 10 year anniversary to bring that trust to an end under the current rules without any cap on the available 100% relief. This is a valuable window of opportunity for trustees to consider what the future of the trust should be and potentially bring the trust to an end under the current rules. 

So what should I do?

There are lots of details in the consultation document (and therefore this article!) with various permutations depending on the trust type and how long it has been in existence. There are also some proposed changes to how the IHT is calculated for some trusts which we have not looked at in this article. 

There are lots of questions about how this will work. Much of the finer detail will only be clear later this year once the consultation response and draft legislation has been published. 

For now, trustees should:

• be aware of the changes and which category of trust and timings they are likely to fit into;
• begin considering the value of assets owned;
• take advice to model what any future IHT charges on the trust assets might be; 
• consider if future IHT charges will be affordable; 
• (for a qualifying life interest trust) ask the beneficiaries about other relievable assets they own personally and to which part of their individual allowance will be apportioned.

While tax charges can often be an important consideration for trustees, they are not the only one. Trustees should also consider:

1. the wider purpose of the trust;
2. beneficiaries’ needs;
3. the trust's terms;
4. any letter of wishes of the settlor; and
5. wider benefits of asset protection and control that trusts provide

For some trusts it will be right that they continue even if there is an increased IHT liability in the future. For others it may be a helpful trigger to consider if now (before 6 April 2026) is the right time to restructure or bring the trust to an end. 

None of these are easy questions for trustees owning businesses and agricultural land, but they are important discussions to have. To help aid those discussions we have produced a two page flyer which can be found here.

Burges Salmon has extensive experience advising family businesses and landowners whether that property is held personally or by trustees. Our private wealth team can assist with tax advice, estate planning, family advice, corporate advice, and property advice. We are able to advise you on these issues as a whole or work alongside your existing advisors to guide you through what the options might be for your business or land ahead of the changes next April.

For some trusts it will be right that they continue even if there is an increased IHT liability in the future. For others it may be a helpful trigger to consider if now (before 6 April 2026) is the right time to restructure or bring the trust to an end.

https://openpublications.burges-salmon.com/changes-to-apr-and-bpr-for-trustees/70496764