Inheritance tax reforms for trusts – government consultation

At the Autumn Budget 2024, the Chancellor announced significant changes to inheritance tax (IHT) Agricultural Property Relief (APR) and Business Property Relief (BPR). The government has now opened a consultation on the proposed changes, although only at this stage on how they will apply to trusts.

While we prepare our response to the consultation, here’s a summary of some of the key points proposed.

APR and BPR changes

As announced in the 30 October 2024 Budget, from 6 April 2026:

• The 100% rate of APR and BPR will be limited to the first £1 million of the combined value of agricultural and business property currently qualifying for 100% relief. The rate of relief for any additional value qualifying for APR or BPR will be 50%.
• The rate of BPR for shares traded but not listed on a recognised stock exchange will be reduced from 100% to 50%.

Consultation scope

The consultation is limited to looking at how the £1 million limit on 100% APR and BPR will apply to property settled into trust. The major focus of the consultation is on property settled into relevant property trusts, which are most trusts created since 2006, and which are subject to an anniversary charge of up to 6% every 10 years and an exit charge when property leaves the trust.

Transfers made on or after 6 April 2026: key points

• There will be separate £1 million allowances for individuals and relevant property trusts.
• The £1 million allowance for individuals will renew every seven years on a rolling basis, like the nil rate band (NRB).
• For individuals the £1 million allowance will apply to:
  • Chargeable lifetime transfers (CLTs) either made in the seven years before death or which are immediately chargeable (such as for property settled into trust),
  • Failed potentially exempt transfers (PETs) ie lifetime gifts to individuals made in the seven years before death,
  • The death estate, and
  • Interests in Qualifying Interest in Possession (QIIP) trusts.
• Where there is a QIIP trust the allowance will be shared between the trust and the individual’s estate on death, in a similar way to the NRB.
• The allowance will not be transferrable between spouses or civil partners.
• For relevant property trusts there will be a 10-year cycle. If you use part of the £1 million allowance on an exit, the amount available on the 10-year charge will be reduced accordingly. The restriction will not apply to exits in the first quarter after a 10-year charge as there is no exit charge.
• For relevant property trusts, exit charges will no longer be based on the rate of tax at the last 10-year charge after APR and BPR – this will be standardised so that the rate is based on the value before relief, as it is in the 10 years before the first 10-year charge. The maximum rate will still be 6%.

Transitional provisions for transfers made before 6 April 2026

 Transfers made before 30 October 2024 

• PETs and CLTs made before 30 October 2024 will not be brought into cumulation when determining the £1 million allowance for chargeable transfers of APR and BPR property arising after 30 October 2024.
• For relevant property trusts, the existing regime for exits will continue to apply until the first 10-year charge on or after 6 April 2026. Therefore 100% BPR and APR exits can be made until 5 April 2026 and won’t use up the £1 million 10-year allowance on post 5 April 2026 10-year or exit charges.

Exit charges after 6 April 2026

• For the first 10-year charge after 6 April 2026, there will be relief for the period before 6 April 2026.

Transfers made between 30 October 2024 and before 6 April 2026

• PETs and CLTs made in the period from 30 October 2024 to 6 April 2026 will be subject to the new rules if the transferor dies within seven years but after 6 April 2026. The consultation document says that:   
  • If a settlor survives seven years then the CLT will not be brought into cumulation for the £1 million allowance for future relevant property IHT charges.
  • If a settlor dies within seven years and on or after 6 April 2026 then any transfer into the trust during the seven years before death will be subject to a 40% IHT charge and the £1 million allowance of the settlor is used up, in the same way as the NRB.

For relevant property trusts, you can settle more property into trust now and exit before 6 April 2026 and the £1 million allowance will not be used up for later IHT events.

Anti-fragmentation rules for trust property settled on or after 30 October 2024

• Where an individual settles property into more than one trust on or after 30 October 2024 there will be only a single £1 million allowance. This will be applied to the trusts in chronological order based on the amount settled. For example, if the first trust in a series of trusts has £1 million of qualifying property settled into it, 100% relief will apply against ongoing trust charges for that trust and will renew every 10 years. But there won’t be any available allowance for any of the other trusts.
• If an individual creates more than one trust on the same day the £1 million allowance will be apportioned across the value of the qualifying property, in the same way as the NRB.
• The allocation of the £1 million allowance between trusts created by the same settlor is fixed at the start, so if a trust cannot use its element of the allowance it cannot be re-allocated to another trust. For example, if an individual settles agricultural property qualifying for 100% APR of £500,000, £300,000 and £200,000 into three trusts respectively, if at the time of an IHT charge any of the trusts can no longer use their allocation of the allowance (such as if there had been a distribution from the trust), the unused allowance cannot be used by either of the other trusts.
• For 10-year charges and exit charges from 6 April 2026, where agricultural or business property is settled by the same settlor across multiple trusts, and valuing the property together would give a higher value than if valuing each individual settlement separately, the higher value will be used. These ‘related property’ rules already apply in some situations, so it would be a case of extending them to apply here to avoid value fragmentation.

Special trusts

• The £1 million allowance for age 18-25 trusts for bereaved young people will renew for each successive beneficiary when their share of funds is distributed, to avoid the eldest sibling receiving the whole benefit.
• Any qualifying agricultural or business property held in a QIIP trust will continue to be treated as part of the beneficiary’s individual estate after death (irrespective of the date of death). If there is a lifetime transfer (PET or CLT) on or after 30 October 2024 and the person with an interest dies on or after 6 April 2026 the £1 million allowance applies to that transfer. Any remaining £1 million allowance of the deceased will be apportioned between their death estate and the QIIP trust.

Interest-free instalments

In an extension to the current rules, from 6 April 2026 IHT payable on property qualifying for APR or BPR at any rate will be eligible to be paid in 10 equal annual instalments, interest-free, as follows:

If the property is sold before the end of the 10-year period, the instalment option ends and all outstanding IHT will become due, with interest.

What next?

The consultation will close on 23 April 2025, and we’ll publish our response shortly after this. Once the government has analysed the feedback it will publish a response document, and draft legislation for technical consultation.

How we can help

Our experts can assess the effect of the proposed changes on your existing estate and succession plans to help you minimise IHT.

If you’d like to discuss APR, BPR or IHT and trusts more widely, please talk to your usual Saffery contact or get in touch with James Stevens.