Last year, following the Autumn Budget, we reported on some of the key changes being made to the UK’s Inheritance Tax (“IHT”) regime. Some of the key changes concerned Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). The UK Government (the “Government”) has now published the detail on how these changes are intended to work.
1. What is changing for APR and BPR?
Much of what was announced in the Autumn Budget is likely to be implemented. The Government has produced draft legislation, setting out how APR and BPR will change from 6 April 2026 :
- The IHT relief available to APR and BPR qualifying assets (“Qualifying Assets”) will be restricted. Every individual will have a £1 million allowance for Qualifying Assets (the “Allowance”). To the extent that they die holding assets up to the value of the Allowance there will be 100% relief from IHT, with the balance of value of Qualifying Assets will only from 50% relief from IHT.
- Qualifying Assets listed, but not on a recognised stock exchange e.g., listed on the Alternative Investment Market, will only benefit from 50% BPR. The same applies for Qualifying Assets listed on a foreign exchange which is not a recognised stock exchange.
- Distinct rules will govern how APR and BPR operates in respect of trusts.
- Where IHT is due on Qualifying Assets, whether they be held in an individual’s estate or in a trust, there will be the option to pay any IHT by way of 10 annual, interest free, instalments.
2. How will the Allowance work in practice?
The Allowance will be available to individuals holding Qualifying Assets and is to refresh every 7 years. It will be open to individuals to transfer Qualifying Assets outside of their estate but to the extent that they do so and then die within a 7-year period, the Allowance will be reduced by the value of the transferred Qualifying Assets, with any balance able to be used in respect of their remaining estate.
Where an individual dies holding Qualifying Assets worth more than the Allowance, the Allowance will be apportioned among the values of the Qualifying Assets that stand to benefit from it. It is worth pointing out that the Nil-Rate Band (assuming it is fully available) may still be used, in conjunction with the Allowance and any other exemptions or reliefs, when calculating liability to IHT.
The Allowance will not impact the IHT free treatment of assets passing between spouses and civil partners or to registered charities. The Allowance itself will not, however, be transferable between spouses.
3. Will the Allowance increase?
The draft legislation allows for the Allowance to be increased in line with the Consumer Price Index. However, the Government intends to keep the £1 million cap on the Allowance, at least, up until the 2029/2030 tax year. It will ultimately be in the Government’s gift to increase the Allowance from that point onwards i.e., an increase is not guaranteed. The are are similar indexation provisions in effect for the basic Nil-Rate Band and indeed the Residential Nil-Rate Band, but these have been overridden to freeze these allowances in recent years.
4. Would gifting or transferring assets impact the Allowance?
In short, yes.
Clients may wish to gift Qualifying Assets to family members or trusts as part of wider estate planning. To the extent that they do that would deplete the Allowance but again, the Allowance does ‘refresh’ every 7 years so there would be scope for further transfers in the future. The Allowance will be applied in chronological order to gifts or transfers of Qualifying Property, so care needs to be taken in planning them.
Transfers to trusts should be treated with particular care. Most, but not all, trusts will be ‘Relevant Property’ (“RP”) trusts. Transfers into those trusts can result in upfront IHT charges. From 6 April 2026, the Allowance will be available to shield Qualifying Assets from upfront IHT charges on being transferred into a RP Trust. Until that date, transfers into trusts can for the appropriate property benefit from relief on unlimited amounts, but that will be re-assessed under the new rules (thus with the restricted £1 million allowance and 50% relief beyond that should the transferor die within seven years).
5. How will these changes impact trusts?
Much will depend on when a trust was established and the kind of trust.
From 6 April 2026 trusts holding Qualifying Assets are to have their own £1 million allowance (the “Trust Allowance”), but restricted to that as a total for a settlor who sets up more than one such trust. Again, on the basis that a RP trust is involved. the RP regime can require IHT to be paid at key points in the trust’s administration. For RP trusts established from 6 April 2026 holding Qualifying Assets, this will mean that the Trust Allowance will operate in a distinct way:
- At the 10-year anniversary of the trust’s establishment the value of the trust fund will need to be checked. To the extent that the trust holds Qualifying Assets up to the value of the Trust Allowance, there will be 100% relief from the ’10-year charge’. The balance of value of any Qualifying Assets will only benefit from 50% IHT relief.
- Exits from an RP Trust can result in IHT charges. The Trust Allowance can be used to provide IHT relief when Qualifying Assets exit the trust. Again, to the extent that Qualifying Assets worth more than the Trust Allowance exit the trust, they will only benefit from 50% relief from IHT on exit. A point to note: where the Trust Allowance is used to shield an exit from a trust from IHT, that will mean that it reduces the available allowance at the next 10-year charge.
6. What happens to pre-6 April 2026 trusts?
There are transitional rules to deal with these kinds of trust but how they work depends on whether or not the trust was established before 30 October 2024 OR on or after 30 October 2024 and before 6 April 2026.
7. What is changing for pensions?
Again, much of what has been announced implements what was announced in the Autumn Budget. In broad terms, under the draft legislation, the key points to note are that:
- From 6 April 2027, the vast majority of unused pension funds and death benefits (“Unused Pensions”) will be brought within the value of a person’s estate and will need to be included what considering the estate’s liability to IHT. The fact that any element of discretion is available on where Unused Pensions may be paid to will not stop it from being subject to IHT.
- Certain Unused Pensions will be exempted from inclusion within a deceased person’s estate for IHT purposes, specifically: a dependants’ scheme pension or a death-in-service benefit.
- Unused Pensions passing to a surviving spouse, civil partner of a deceased person or to a registered charity will continue to be exempt from IHT.
- Where IHT is due on Unused Pensions, it will generally be the responsibility of the deceased’s personal representatives i.e., the executors of their estate, to arrange settlement of the IHT. Pension scheme administrators may be held responsible for settling IHT on Unused Pensions but only in limited circumstances.
8. What does this mean for clients?
There is no denying that that the Government’s proposals may require clients to revisit their estate planning in a significant way: assets which up until now have never been within the scope of IHT may be squarely within the UK’s tax net. To plan effectively, it would be worth:
- Reaching out to clients to gauge their reaction to the Government’s changes.
- Sounding out clients on their concerns for their estate generally (including the terms of their will) and the extent to which they would wish to revisit arrangements in order to take account of the changing landscape.
- Co-ordinate with other advisors to ensure that any plan of action is fully thought through.
Brodies has been following the Government’s review of APR, BPR and the IHT treatment of pensions since they were announced in the Autumn Budget 2024. Our teams of corporate, rural business and estate planning lawyers have extensive experience of advising on the structuring of agricultural and business holdings to achieve client objectives. If you would like help to show clients what the changes mean, and to explore how they can adjust to take account of them, please contact us.
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