HMRC Consultation on the changes to APR and BPR and the application to trusts

The Chancellor's Budget on 30 October 2024 included far-reaching proposals restricting the IHT reliefs available for agricultural property (Agricultural Property Relief (APR)) and interests in businesses (Business Property Relief (BPR)), taking full effect from 6 April 2026. Recognising that there would be implications for trusts, a consultation on the application of these restrictions to trusts was also announced. On 27 February 2025, HM Revenue & Customs published an open consultation: Reforms to Inheritance Tax agricultural property relief and business property relief: application in relation to trusts. The consultation will run until 23 April 2025.

The relevance of APR and BPR to trusts occurs in three principial scenarios: (i) when qualifying assets are transferred by a settlor to trustees, (ii) when trusts that contain qualifying assets are subject to the relevant property regime (RPR) and ten year charges to IHT, and (iii) when qualifying assets are transferred from trustees to beneficiaries.

Overview

On first blush, the consultation is largely as expected. It envisages a £1M 100% APR/BPR allowance for individuals which will be available on the transfer of qualifying property to trust, behaving in a similar way to the standard nil rate band (of £325,000) that each individual has. Similarly, each trust existing before the Budget and which had APR/BPR property within in it on 29 October 2024, will have a £1M 100% APR/BPR allowance, available to provide relief on exit charges and ten year charges. However, multiple trusts established by the same settlor on or after Budget day will need to share a £1M 100% APR/BPR allowance on a strict (and untransferable) chronologically allocated basis. There are some new points coming to the fore also, including what may be an unhelpful expansion of the related property rules and how they apply to multiple trusts established by the same settlor and which contain APR/BPR qualifying assets.

For transfers to trust

• The consultation confirms that the existing rules (with scope for unlimited APR and BPR) apply to transfers made to trust prior to the Budget.
  
• Transfers made to trust during the "transitional period" (being 30 October 2024 to 5 April 2026) will be subject to the existing rules, unless the settlor dies after the transitional period but within the usual seven-year period following the gift. In that latter scenario the new rules, and the limitation of 100% APR/BPR to the first £1M of qualifying assets given away, and only 50% relief available on any excess value over and above that, will apply. That does confirm that there are planning opportunities to transfer assets to trust with the benefit of unlimited 100% APR/BPR before 6 April 2026, and that these (unlimited) opportunities will no longer apply after 5 April 2026.
  
• Transfers after 5 April 2026 of APR/BPR property to trust will suffer upfront IHT charges only if the value exceeds £1.65M, provided all the allowances are available. The £1M 100% APR/BPR allowance will cover the first £1M, the balance of £650,000 will qualify for 50% APR/BPR with the unrelieved property covered by the settlor's nil rate band (£325,000). Any excess value is taxed at the lifetime rate of 20% at the outset – increasing to up to 40% if death occurs in the seven year period, with taper relief available after year three.
  
• A welcome clarification is that an individual's £1M 100% APR/BPR allowance will, if used, refresh every seven years. That will allow the transfer of £1.65M of APR/BPR property to trust every seven years without upfront IHT. Where trust structures are considered beneficial in the wider context for asset protection purposes, this may allow substantial value to be transferred in to trust over time without upfront IHT being payable.

In respect of ten year charges

• Each trust established prior to Budget Day (that contained qualifying APR/BPR property on 29 October 2024) will have its own £1M 100% APR/BPR allowance. When calculating ten year charges the first £1M of APR/BPR qualifying property will effectively be taxed at 0%. The value over and above that can qualify for 50% APR/BPR. In effect, that might mean the value over and above £1M may suffer a 3% charge every ten years (and less if the trust also has a nil rate band available).
  
• Where a settlor has transferred APR/BPR property to trust on or after 30th October 2024, that trust will have a £1M 100% APR/BPR allowance. If the settlor transfers APR/BPR property to multiple trusts on or after 30 October 2024, then there will only be one single £1M 100% APR/BPR allowance. That allowance will be allocated in chronological order, with the earlier settlements benefiting from it first. This fixed allocation will apply for the lifetime of the trust. If an earlier trust that had been allocated the allowance is later wound up or no longer has APR/BPR property that qualifies, its allowance cannot be allocated to any other later trust.
  
• HMRC are also consulting over an extension of the related property rules so that "qualifying agricultural or business property settled by the same settlor across multiple trusts can be connected for valuation purposes". This reduces the scope for discounting the value of such property when it is held by separate trusts. It is not clear if this proposed extension will be limited to post-Budget Day trusts only, or to all existing trusts established by the same settlor.

For transfers from trust

In the case of trusts that are subject to the relevant property regime and face an exit charge when property passes from the trust to an individual beneficiary, there are two main points.

• For such trusts established prior to Budget Day, it is proposed that the new rules will not apply to exits made before the next occurring ten year charge after Budget Day. Thus, it appears that there may be scope to bring these trusts to an end at any point before the next ten year charge with APR/BPR applying in an unrestricted manner.
  
• The new rules (which will apply to pre-Budget trusts after the next occurring ten year charge after 5 April 2026, and for post-Budget trusts from 6 April 2026) are that exits over the ten year period before the next arising ten year charge up to £1M are able to qualify for 100% relief (if the trust has the available allowance), but exits over and above that can only qualify for 50% relief. On the next arising ten year charge, any exits that have occurred in the previous ten years using the £1M allowance will reduce the allowance available for calculating the ten year charge. After that ten year charge, the £1M allowance refreshes. The calculation of ten year charges has always been complicated by exits in the preceding ten years – the proposals only make it more complex.                                                                                                

Where the trust is not within the relevant property regime, but is rather an "aggregated liferent trust" and treated as part of the estate of the liferent beneficiary (e.g. pre Finance Act 2006 liferent trusts and most liferent trusts arising from wills), when the property leaves the trust and passes to an individual the IHT treatment will be as it is now, but the trust will not have its own £1M 100% APR/BPR allowance. Instead, the beneficiary with the liferent interest will have their personal £1M 100% APR/BPR allowance for transfers occurring from 6 April 2026, and this will be shared (pro rata where applicable) between any APR/BPR transfers from their own personal estate and the aggregated liferent trust.

Instalments and interest

Finally, the Consultation confirms the intention that where IHT is payable as a result of the restriction of 100% APR/BPR, that IHT can be paid by ten annual interest free instalments.

Conclusion

In conclusion, it is a mixed bag, but largely as expected. The refreshing of an individual's £1M 100% APR/BPR allowance every seven years is welcome. The added complexities regarding the calculation of exit charges and ten year charges are not. An expansion of the related property rules for valuation purposes is perhaps the most concerning.

The principal tax planning considerations for individuals and trustees will be

• Is the opportunity to settle APR/BPR qualifying assets into trust before 6 April 2026 with unlimited 100% APR/BPR one to grasp?
  
• For trustees of existing trusts which will now face IHT on future ten year charges, is advancing the APR/BPR property to beneficiaries before the trust's next ten year charge a better option than paying that tax?

Of course, this is a consultation. While it is not yet law, it informs us of the likely direction of travel and shape of the new rules as they will apply to trusts, and might inform tax planning to be undertaken before then. Given that there will be a Government response to the results of this consultation and a further consultation on draft legislation is proposed, it will be some while yet before the changes to come achieve some degree of certainty.