Further details published on Inheritance Tax reform for farms & businesses

We don't yet have the draft legislation, but further details have just emerged on the government's controversial plans to restrict inheritance tax relief for business and agricultural property. These reliefs (BRR and APR) are currently unlimited in amount and at best can provide 100% relief – i.e. the equivalent of complete exemption from inheritance tax for qualifying businesses and farms.

In the Budget on 30 October 2024, Rachel Reeves announced that 100% relief will be restricted to £1m per person (or per trust, in some cases) for all of their business and agricultural property combined, for inheritance tax charges arising on/after 6 April 2026. Only 50% BRR and APR will be available above that £1m “allowance”, giving an effective rate of 20% for value exceeding £1m instead of the standard 40% inheritance tax flat rate.

A consultation document published on 27 February now confirms how HMRC propose the allowance is to apply, particularly in relation to trusts. It reveals several interesting features which – in some cases – may slightly soften the blow of the original announcements. For instance:

• Pre-Budget gifts of qualifying property will have ‘banked’ 100% relief without limit (assuming all other conditions for the reliefs are met).
• Post-Budget gifts made before 6 April 2026 can also benefit from 100% relief, without limit, if the donor survives for 7 years (and generally with taper relief after 3 years).
• After 5 April 2026, up to £1m will be tax-free into trust but the £1m allowance will “refresh” every 7 years on a rolling basis. So, those with youth on their side can give away £1m of qualifying property into trust every 7 years free of tax. Care will need to be taken to avoid reservation of benefit rules applying.
• As is currently the case, unlimited outright gifts of qualifying property can be made to an individual and may benefit from capital gains tax deferral if certain criteria are met, and subject to a the 7 year survival rule.
• In the event of death, the allowance will be applied in chronological order so the earliest gifts will get first bite at 100% relief.
• It may be sensible for those who have not already done so to make a trust to shelter £1m of qualifying property from inheritance tax in addition to any qualifying property they hold personally. The trust allowance will also refresh on each 10-year anniversary charge (unless ‘used’ on distributions in the preceding years). This may enable owners to utilise trust planning to take as much value as possible out of their own inheritance tax estate by maximising these allowances.  This potential opportunity will need to be balanced against the potential benefits of keeping assets controlled in single ownership.
• Certain anti-fragmentation and related property rules are being considered which may restrict the ability to use trusts created by e.g. spouses to access further £1m trust allowances.
• While an unlimited amount of qualifying property can pass into a trust tax free between now and 6 April 2026, this will be vulnerable to the settlor’s death within 7 years and only a single allowance will be available in respect of trustee tax charges arising subsequently on 10 year anniversaries.
• Where tax is payable by individuals or trusts, HMRC have confirmed that the tax can be paid by annual instalment over 10 years without interest on each instalment until it falls due.  This will allow farmers and business owners to invest funds to pay the tax and benefit from inflation reducing the real value of the charge if paid over 10 years.
• If multiple trusts are made by the same person after 30 October 2024, only one allowance will be available among the trustees for their decennial charges and will be allocated to them in chronological order.
• Pre-Budget trusts with qualifying property that are subject to inheritance tax on distributions and on 10-year anniversaries will be in a better position. They will each benefit from a full £1m allowance. Furthermore, the new regime will not apply until their first 10-year anniversary falling on/after 6 April 2026 and subsequent tax charges. Any exit charge before that anniversary, even if after 6 April 2026, will still benefit from unlimited 100% relief
• Finally, it’s worth noting that ‘qualifying interest in possession’ trusts will not benefit from their own allowance according to the consultation document. The income beneficiary’s £1m allowance will be applied to any inheritance tax charge on the trust’s agricultural or business assets. So if the beneficiary also has qualifying property of his own, a single £1m allowance will be shared proportionately between his estate and the trust.

The consultation runs until 23 April 2025 and we are unlikely to see legislation before the Summer so it is still early to take decisive action for these changes. However, it is not too soon to start planning and it looks as though there will be opportunities to make lifetime gifts and put business and agricultural property into trust, and out of trust, before the new regime begins in April 2026. Please speak to your usual adviser at Boodle Hatfield for more detailed bespoke advice on preparing for these new rules.