Inheritance tax changes – the impact on trusts

The Chancellor's Budget on 30 October 2024 contained far reaching changes to Inheritance Tax (IHT), including a significant restriction on Agricultural Property Relief (APR) and Business Property Relief (BPR) which will take effect on 6 April 2026.

This insight considers – in so far as it is possible to do so at this stage - the possible impact of these changes on existing and future trusts. The government has produced a summary of the proposed reforms and will publish a technical consultation in early 2025, which will focus on transfers to trusts and charges on trust property. Draft legislation implementing the changes for trusts is expected to follow that consultation. This analysis is based on the existing rules and the government's statements about the intended changes.

Existing rules on IHT in trusts

Trusts are subject to their own IHT regime. Most trusts, and all discretionary trusts, now fall into the "relevant property" regime. This means that transfers into trust are chargeable transfers for IHT, suffering an entry charge. Entry charges are at the current lifetime rates of 0% (to the extent that the settlor has available nil rate band) and 20% on the balance over and above any nil rate band. Transfers out of trust suffer an exit (or "proportionate") charge. Property which remains within the trust is liable for a ten-year (or "principal") charge on every ten-year anniversary of the trust being established, at a maximum rate of 6%. Exit charges are also at a maximum rate of 6%, with the charge time-apportioned to reflect the proportion of the ten-year period which the property spent in the trust.

The relevant property regime does not apply to a smaller number of trusts, very generally liferent trusts that were in existence in 2006 and liferent trusts arising following a person's death. Rather than be subject to the relevant property regime, these trusts are deemed to be part of the estate of the liferenter and are subject to IHT when the liferent ends typically on the death of the liferenter. While such trusts are affected by the new regime, those effects are best considered as akin to those affecting taxpayers owning qualifying assets outright which are considered in separate insight notes.

The effect of APR and BPR is to reduce the value of the qualifying assets in the trust by 100% or 50% for IHT purposes. The application of APR and BPR is currently unlimited by value. When the criteria for 100% relief are satisfied, in most cases this means the qualifying assets are effectively exempt from IHT on transfer into trust, transfer out of trust, and on ten-year anniversaries.

The Budget changes

The Budget proposes considerable restrictions to APR and BPR, such that both will continue to be available at 100% on IHT chargeable events, but capped at a value of £1m. If the value of the property which is the subject of the charge exceeds the £1m cap, that excess will only qualify for APR or BPR at a rate of 50%. That leaves 50% of the excess with no relief and subject to tax at the usual rates – 20% on entry and a maximum 6% on exit and ten-year charges. In other words, the value over £1m will pay IHT at half of the usual rates. That means an effective rate of 10% on entry charges, and an effective maximum rate of 3% for exit and ten-year charges.

There is an exception to these proposed general rules, in the case of AIM shares that currently qualify for 100% BPR. The rate of BPR on such shares is reduced to 50%, in all cases. That means that all AIM holdings, whether valued at more or less than £1m, will only attract 50% BPR, as compared to the current 100%.

Sharing the £1m threshold among multiple trusts

The government's proposal is that, for trusts which were settled prior to 30 October 2024, each trust will have a £1m threshold for 100% relief, regardless of the number of trusts settled by the truster. However, for trusts established after 30 October 2024, the government intends to legislate such that the £1m allowance for 100% relief is shared among trusts settled by the same settlor, much like annual CGT allowances are shared under current rules. If, for example, a person settled two trusts, then each of those trusts will only benefit from 100% relief on the first £500,000 of agricultural or business property held in the trust.

The impact of the changes

The following simple examples illustrate how trustees of relevant property regime trusts could be impacted by these changes, if they are implemented as proposed.

Impact on trusts

Example 1
Example 2

A trust holds agricultural property, which currently qualifies for APR at 100%. The property is valued at £8m. Under current rules, the property would not suffer an IHT liability on ten-year anniversaries and on property passing out of the trust. That is because APR would operate to reduce the value of the property liable to those charges to zero, such that no IHT would be payable.

Under the proposed new rules, only the first £1m of agricultural property would benefit from relief at 100%, with the remainder receiving relief at 50%. Assuming the trust was settled by a single settlor, the IHT payable on the ten-year charge under the new rules could be as much as £210,000.

If the trustees of the above trust also owned business property, valued at £3m, which would qualify for 100% BPR under current rules, then those current rules would still operate to mean that the IHT charge on ten-year anniversaries or exits from the trust would be £0. Under the new rules, as the £1m threshold for 100% relief is aggregable between APR and BPR, the ten-year charge could be as much as £300,000.

What this means for you now

Our general view is that, where existing trusts are involved, any detailed tax planning is best considered (at the earliest) once the technical consultation is underway in early 2025. However, where trustees are likely to encounter IHT charges shortly after 5 April 2026, earlier planning may be advisable.

Stay up-to-date with IHT developments

These developments are under careful review by Brodies. If you wish to be kept updated as the landscape develops, please register for updates below. Should you wish to discuss your specific circumstances please contact your usual contact at Brodies or any one of the Personal team.