Death and Taxes S5:E3 – Key updates for UK trusts: business relief, agricultural relief, IHT, and compliance

So, I’m delighted to have with us Andrew Kerr, who’s one of our senior associates in the Tax and Trust team, and he’s been following very closely all the recent developments on Agricultural Property Relief and Business Property Relief and all things UK Trust. So, Andrew, first of all, welcome to the podcast. And secondly, if you could summarise in 30 seconds what someone should take away from this podcast if they’ve got limited time available to them and can’t go through the whole thing.

Andrew Kerr (00:55)

Well, 30 seconds is a challenge, but I think there are probably three main things that people should be thinking about. So, the first of those are the new proposed rules for Agricultural Property Relief and Business Property Relief. And the important thing there is that there is going to be a new £1 million cap on the availability of 100 % of relief. And so for trustees, it’s important to determine whether trust assets would benefit from BPR and APR and how the new cap will impact this. In terms of dates for this 30th of October 2024, so the day of the budget and when this was all announced is a key date. And that’s important to determine which trusts have access to the full million-pound allowance and which don’t. So, trustees will need to think about those positions and how the new rules will impact them.

The second is then compliance. So, we are increasingly seeing trusts which would previously have been thought of as pure UK trusts. So, they are governed by UK law, they’re only connected to the UK resident individuals, trustees, beneficiaries, but actually they have compliance obligations in other jurisdictions. And so these might arise simply because the trust has made investments there.

It’s actually quite easy to do that without realising it because many investment funds are situated outside of the UK or there might be direct holdings that they know that they have. So for these, trustees need to think about whether they have investments abroad and whether they’re comfortable with the compliance implications of having those if there are any implications of that. And then the third and final thing I would say in my 30 seconds, which is probably almost run out Ed, is that until the 5th of April 2025, the Inheritance Tax status of a trust was essentially determined by the combination of the settlor’s domicile status at the time the trust was set up and then where those trust assets were situated. But 6th of April 2025 onwards, that is now changed and so the IHT status of the trust tracks the settlor.

So trustees now need to keep an eye on their settlors status and may actually find that they have one off IHT charges followed by much reduced long-term IHT exposure if the settlor then leaves the UK. So really the thing here is for trustees with settlors who have left the UK should bear this in mind and keep track of where their settlor has got to.

Ed Hayes (03:30)

Thank you, Andrew, for the summary. If we kick off with the Agricultural Property and Business Property Relief changes, what are the key points for trustees to be aware of here?

Andrew Kerr (03:40)

So, I think the main thing for trustees is firstly figuring out what kind of trust you have. And then secondly is to figure out when was your trust created and therefore what rules apply to this new and under the new rules. And so, I think firstly, what kind of trust do you have? So here under the new rules, you need to think about if it’s a what’s called a qualifying life interest trust. So is there a life tenants of the trust? Is it held for one person? And if it is, then actually under the new rules within million-pound cap, those trust assets are added to those personal assets of that beneficiary. So you will need to figure out what those personal assets of the beneficiary are that might get relief from APR and BPR.

And you’ll need to start to model, okay, so what would happen on the death of this life tenant? What would the inheritance tax be? How do we pay for that? How does that split between the trust assets that we have and the beneficiaries’ personal assets? So that’s the number one trust to think about. So, the second kind of trust is a relevant property trust and how the new rules for the relief are going to apply to these depends on when the trust was created.

So, for trusts that were in existence before the budget, so before the 30th of October 2024, the question is, is that the time of the budget, so immediately before the budget, did those trusts have any relievable assets in them or relief at 100 %? If the answer is yes, then that trust gets a million pounds of allowance for APR and BPR. And if it didn’t, then it doesn’t get any automatic allowance, but it can acquire allowances via other means. And what this means is that for these kinds of trusts, trusts that existed pre-October 2024, you need to start to think about future tax charges in these trusts. And so the important one and the key date is when is the next 10-year anniversary for the Trust. And these new rules will apply to the first 10-year anniversary after April 2026. So, for many Trusts, there’ll be a longer window here to do planning. For Trusts that may have a 10-year anniversary in May 2026, there’s not much time to be thinking about how these new rules will work.

Ed Hayes (06:17)

Is it right then that if your trust is coming up to 10-year charge between now and April 2026, you’re actually slightly onto a winner there?

Andrew Kerr (06:24)

Yeah, absolutely. So, you’ll have your 10-year anniversary under the old rules, and then your next 10-year anniversary after April 26 will be, you know, nine, 10 years in the future. So, you’ve got all of that period of time where that trust will continue to work under the old rules in terms of exit charges, and then the new rules will bite on that first 10-year anniversary that happens after April 26.

So those dates are really key to understand for trustees and when their 10-year anniversaries are going to be. And then for trusts that have perhaps been created after the budget, the new rules start to kick in sooner. So, if you created a trust in November 2024, the new rules are going to start to apply to that. The trust will have a limited allowance in terms of the assets that might get relief. And that depends on the value of those assets that have gone into it and how many other trusts the settlor has set up. And really that starts to then be the picture for trustees in the future. It is tracking what other trusts that settlor may have set up with relievable property, how that trust allowance has been divided between those various trusts to then think about what the inheritance tax charges are going to be in that trust.

Ed Hayes (07:48)

Great. And for people who are considering, who kind of knew, they’re aware that these rules are coming in, they’re conscious that everything’s about to change, but they also realize, this is happening in April 2026. I’ve got some time between now and then. Is there merit still in considering setting up a new BPR APR trust?

Andrew Kerr (08:04)

Yeah, absolutely. And so I suppose there is this window until April 26 where the old rules still apply to transfers into trust. So, you can put an unlimited amount of relievable property into a trust and provided all the relief supply properly as you intend, then there’s no entry charge into that trust. So you get all the value out of your estate. So that still works well.

But what you need to then remember is that that new trust is going to be subject to the new APR, BPR rules in the future. And so it will have a cap of up to a million pounds on the available relief in the trust. So, while you might be able to get the assets into the trust without charge, you will have charges on in the future such that the value in the trust is above the allowance.

Ed Hayes (08:58)

So, it’s kind of a one-off opportunity to set up one of these trusts with a cheaper tax charge on the way in, hopefully none, but your long-term exposure is going to be as with kind of any other.

Andrew Kerr (09:08)

Exactly, yeah. And for some people that will be right, it will be right to have the flexibility of a trust, but you need to be aware of what that cost is. And essentially, it’s a cost benefit analysis of does a trust give me what I want? Does it give me the control? Does it give me in the right structure? And am I prepared for the trust to have to burden that tax liability?

Ed Hayes (09:29)

Great, well, thank you very much. So, moving on to point two from the summary earlier and trustee compliance obligations. I’m aware that we’ve had many trusts over the years which are kind of pure UK, for want of a better phrase, who’ve probably assumed that they just can’t or won’t have any reporting in other jurisdictions. Maybe you could kind of walk us through perhaps how that’s changed over recent years in terms of actually that’s something that the assumption is probably more dangerous now than it used to be.

Andrew Kerr (09:56)

Yeah, I think that’s absolutely right. The compliance for trusts is ever increasing. So, you have the normal TRS, CRS, FATCA, various registrations, the yearly returns that you have to do and trustees and their advisors are all up to date on those. But you’re right, that there is a growing compliance for trusts and particularly where it may not necessarily be expected. So, where you do have trust that is what you might say sort of UK through and through. So all of your trustees are in the UK. All of your beneficiaries are in the UK. Then you may think, well, surely there can be no reporting or compliance needs abroad. But actually increasingly we are seeing that there are issues to be dealt with, and some trustees are missing those.

So, for example, I often advise landed estates and clearly where you own land, there are issues in relation to registration of land. And if those landed estates happen to own land in another country, then again, that’s an obvious example where you might have to take local advice. But actually many of those trusts will also have investment portfolios sitting alongside perhaps the land ownership or perhaps other trusts that have those investment portfolios sitting in them.

And while your trust is UK, some of those investments might not be UK and trustees need to be alive to some of the other reporting requirements that there are. So we’ve come across examples where trustees have held perhaps shares listed on the French stock exchange or there might be requirements in Ireland as another one we commonly come across. And actually in each of those jurisdictions, there is a requirement for the trustees to register what they own, provide information about the ownership, and there can be penalties if they’re not dealt with properly. And so it might be slightly alien to a trustee who isn’t a professional perhaps or isn’t taking ⁓ regular advice that actually there are going to be these additional requirements. And so for some trustees, it might be that they reduce those holdings to simplify their compliance burden. For others, it might be that they actually change their investment types. They might invest in something where actually that compliance is a few levels back and so they don’t have to be dealing with it. But it is something important for trustees to bear in mind.

Ed Hayes (12:15)

And is that just trust in the sense of substantive family trusts? Or are we also talking about life policy trusts and all these things that actually we know as trusts, given we’re lawyers, but lots of people probably don’t think of them as trusts in their day to day.

Andrew Kerr (12:29)

Yeah, absolutely. It covers the full range of what a trust might be. And so you’re absolutely right that it’s not just those ones that perhaps you might have the yearly meeting for, but it’s also, you know, trusts that perhaps are slightly more dormant and you think less of or less regularly about. And you still need to think about those and what do they hold? What are the local requirements for those and are any registration steps or additional things needed for them.

Ed Hayes (13:00)

Well, thank you for the summary on the compliance points. You’re absolutely right that trustees who maybe haven’t always thought about these things do need to factor in whether they have obligations outside of the UK.

And another point I suppose we see as a bit of a trap, albeit there are some potential benefits that flow from it as well, is the change in the new inheritance tax laws for trust. And think lots of people got used to the old regime under which essentially the inheritance tax for trust was kind of set of establishment. You had to look at a combination of what was the settlor’s domicile when the trust was established and provided the settlor was non-UK domiciled and the trust only held non-UK situated assets. That trust would usually just be outside of the scope of UK Inheritance Tax going forwards. Conversely, if you had what we would think of as a UK trust where you had a UK resident settlor and if they were UK domiciled at the time they set up the trust, then actually the situation of the, or the situs of the assets didn’t impact inheritance tax and just the fact you had a UK domiciled settlor was enough to mean that your trust fund was effectively within the scope of UK Inheritance Tax forevermore. Now that has changed quite drastically since the 6th of April 2025. So now we don’t look back at the domicile of the settlor in most cases, like lots of tax rules, there are plenty of caveats here.

But in most cases, what the trustees have to do is look at whether their settlor is long-term resident. That’s a confusing term because it’s related to, but different to, tax residence in the normal sense. You can be tax resident without being long-term resident and you can be long-term resident without being tax resident. But in most situations, you’ll become long-term resident once you have been tax resident for 10 tax years.

So 10 is really the key number to be thinking of here. And once an individual becomes long-term resident, then the starting assumption is any assets in trusts which they have settled are likely to be within the scope of UK Inheritance Tax, even if they are situated outside of the UK. And conversely, if an individual ceases to be long-term resident, then actually the trust fund, to the extent at least, is non-UK situated, will no longer be within the scope of UK Inheritance Tax. And so, the inheritance tax position can improve quite drastically. There is, a bit of a sting in the tail if your settlor ceases to be long-term resident. Because although going forwards, you might find that part of the trust fund is reduced in its inheritance tax exposure. And indeed, if you invest it or switch the investments to be more focused outside the UK, you can get very significant inheritance tax relief.

There is usually an exit charge when the individual loses that long-term resident status. And that can be up to 6 % on the value of the non-UK situated assets at the time. I think it’s also just worth mentioning the inheritance tax tail here. It’s something that’s caused a lot of consternation amongst clients and certainly something that I think probably one of the more talked about elements of the new rule set we have. Once you’ve become long-term resident, you effectively retain that status for as long as you are tax resident in the UK and for a tail period once you cease to be tax resident in the UK. And that tail can last anywhere between three and 10 tax years, depending on your circumstances. Generally, the longer you were in the UK before departure, the longer your tail period will be. And it’s only when your tail period runs out that you lose that long-term resident status.

So, if you take an example of someone who has lived their whole life in the UK to date, they will clearly be long-term residents at the moment. They then leave the UK. They’ll probably have a tail towards the top end, towards the 10-tax year threshold. So it’s only once they’ve been non-UK resident for 10 tax years in that case that they will cease to be long-term resident. But at that point, any trust which they have settled might have an exit charge. And then going forwards, the inheritance tax data, those trusts will change.

Key reasons for flagging this on a podcast about UK trusts is that think lots of the recent changes, which have been described as changes to the non-dom regime, I think people have assumed that those are not relevant to trust individuals that are kind of born and bred UK, for want of a better phrase. Whereas in fact, the inheritance tax changes can impact absolutely anyone, given the right circumstances, and certainly can impact trust when perhaps it might be bit of a surprise if everyone was still working on the old rules.

Another point for trustees, even of UK trusts, to be aware of. So hopefully that’s been a useful run through of several things that trustees should be thinking of or already thinking of. Andrew, anything, just before I let you go, anything that’s coming up in the future that we should be flagging to people?

Andrew Kerr (17:41)

So, the APR, BPR draft legislation that we have is still draft, albeit it hasn’t really changed from the proposals that were set out in the budget. So, we’re not necessarily envisaging many changes to the points where it actually becomes law. But the draft legislation is under consultation technically. So that runs out in mid-September. So people will feedback during that period.

And so potentially late September, October into later in the year, there may be some smaller changes coming through and people should keep an eye on what they may be.

Ed Hayes (18:16)

Great. Well, thank you very much, Andrew, for all your help today. And yeah, we hope to see you on the podcast again soon.

Andrew Kerr (18:21)

Thanks for having me.

Ed Hayes (18:22)

Thanks again for listening to this episode of Death and Taxes and Everything in Between, the private wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com or on our LinkedIn page. And do keep an eye out both for other episodes we’ve already published this year about, for example, people coming to and leaving the UK and upcoming episodes, for example, one focusing on business owners and how the BPR and APR changes will be impacting them.

Our specialist team will bring you our views on the new rules and their practical implications for clients. So don’t forget to subscribe and thanks again for listening.