Agricultural and business property relief – consultation on the new rules for trust: where are we now?

On 30 October 2024, in her first Budget, the UK Chancellor, Rachel Reeves, announced the introduction of a limit to the 100% rate for inheritance tax (IHT) relief on agricultural property and business property.  This is to be introduced with effect from 6 April 2026.  

At the same time, the Government indicated that they would consult in early 2025 on the detailed application of the policy to charges on property within trusts. The promised consultation was published at the end of February 2025. 

The main points of interest in the consultation are, as follows:

INDIVIDUALS

• The proposed £1 million allowance for individuals' qualifying business and agricultural property ("qualifying property") will refresh every 7 years on a rolling basis, as is the case currently for the IHT nil rate band. This contrasts with the announcement at the Budget that the £1 million would be a lifetime allowance.  It will allow individuals to make chargeable lifetime transfers of up to £1 million of qualifying property into trust every 7 years.
• On death, the £1 million allowance will apply across the entirety of the deceased's estate. Accordingly, if there is qualifying property in more than one part of the estate (e.g. in a qualifying interest in possession trust, in which the deceased had a life interest, or a gift with reservation ceasing on death) the allowance will be apportioned across the qualifying property.
• Despite representations by professional bodies in favour of a transferable allowance, the consultation confirms that any unused allowance will not be transferable between spouses and civil partners.  However, the estate of each will have their own allowance. 

TRUSTS

• Trustees will also have a £1 million allowance available on the combined value of qualifying property held in relevant property trusts (primarily those that do not have a qualifying interest in possession or are established by Will for certain vulnerable beneficiaries).
• This allowance will apply when calculating relief available on 10-year anniversary or exit charges.  Where qualifying property exceeds the £1 million threshold, relief will be available at 50% on the balance.
• The £1 million allowance for trusts will refresh every 10 years, so if some or all of it is applied against one or more exit charges during a ten-year period, only any remaining balance will be available to provide 100% relief at the next 10-year anniversary. 
• Currently, if property leaves a trust before the first 10-year anniversary, the availability of agricultural property relief (APR) or business property relief (BPR) is ignored when calculating the rate of IHT payable.  APR and BPR will then be applied to property that qualifies, but the rate of IHT paid on other property will be correspondingly higher because it is based on the value of all the property leaving the trust. 
• After the first 10-year anniversary, APR and BPR are taken into account so the rate of IHT payable on property leaving the trust is based on the value of non-relievable property only.   Accordingly, the IHT rate paid is lower. 
• The consultation proposes that from 6 April 2026, APR and BPR will not be taken into account whenever property leaves the trust and, as such, the rate of IHT payable will always be higher on any unrelieved property leaving the trust than would otherwise be the case.  If this rule is introduced, there may be value in planning carefully when qualifying and non-qualifying property should leave a trust.

TRANSITIONAL RULES 

Pre-30 October 2024 transfers

• PETs and other transfers made before 30 October 2024 will be unaffected by the new rules and the £1 million allowance. 
• Where qualifying property has been settled into trust before 30 October 2024, it will be brought within the new rules with effect from the first 10-year anniversary after 6 April 2026, with the new allowance applying only to whole quarters falling on or after that date. 
• After that anniversary, the £1 million allowance will apply to all qualifying property, whenever settled.

Transfers made between 30 October 2024 and 5 April 2026 inclusive ("transitional period")

• If PETs and other transfers are made during the transitional period, the existing rules will apply if the donor dies before 6 April 2026.
• If the donor dies on or after 6 April 2026 and within 7 years of the transfer, the new rules and £1 million allowance will apply to PETs and other transfers of qualifying property, including into trust, made during the transitional period.
• Where qualifying property is settled during the transitional period and leaves the trust before it ends, it will not be subject to the new allowance or rules, and will not affect the trustee's £1 million allowance at the next 10-year anniversary.
• Exits of qualifying property after the end of the transitional period will be subject to the £1 million allowance and will reduce the value of the trustees' allowance at the next 10-year anniversary.

ANTI-FRAGMENTATION

• At the time of the Budget, the government made clear its intention to prevent people reducing their IHT liability by settling qualifying property into multiple trusts on or after 30 October 2024, each of which would potentially receive a £1 million allowance. 
• Accordingly, any trusts set up on or after 30 October 2024 are to share a single £1 million allowance, to be allocated in chronological order (or apportioned equally in the case of multiple trusts set up on the same day). The allocation will be fixed for the life of the trust, so if one trust cannot use the whole of its allowance because, for example, qualifying property is transferred out of the trust, a related trust cannot use the outstanding allowance.
• Qualifying property in excess of the allocated allowance will be relieved at 50%.

RELATED PROPERTY

• In addition, the consultation proposes a new "related property" rule for IHT purposes. Related qualifying property settled across multiple trusts would be valued together.  This is because if property is valued in smaller segments, it may receive a lower valuation than would be the case if it was all valued together.  (Such a rule already exists for lifetime transfers and those on death). 
• If this results in a higher valuation than the total of separate valuations of property in each settlement, the proposal is that the higher value should be used for the purposes of the 10-year anniversary and exit charges.

SPECIAL TRUSTS

• The consultation proposes that "special trusts", such as temporary charitable trusts or employee benefit trusts should also be subject to the £1 million allowance, but that this allowance should not refresh, to reflect the fact that such trusts are not subject to 10-yearly charges.
• Certain trusts for bereaved young people, known as "Age 18 to 25 trusts", are subject to an exit charge each time a beneficiary receives their share of trust property. To avoid the oldest of a group of siblings using up the whole £1 million allowance to the disadvantage of younger siblings, each beneficiary will receive their own £1 million allowance.

PAYMENT OF IHT BY INTEREST-FREE INSTALMENTS

The consultation confirms that an option to pay tax in interest-free instalments over a period of 10 years will be introduced for all property eligible for APR or BPR, both for property owned by individuals and held in trust. 

PLANNING POINTS

In our previous note summarising the Budget announcements on APR and BPR here, we suggested that, once the consultation was published, individuals consider the pros and cons of settling qualifying property into trust before 6 April 2026.

One positive measure proposed in the consultation is the rolling nature of the £1 million allowance, potentially enabling individuals to settle up to £1 million of their qualifying property every seven years without creating an immediate 20% IHT liability as would usually be the case. 

However, the proposed anti-fragmentation rules will mean that the trustees of all trusts settled by one individual will share a £1 million allowance for 100% relief.  While this will renew every 10 years, it will limit the value of putting qualifying property into trust. 

Overall, it is disappointing that the government has not used the consultation as an opportunity to revisit some of the harsher aspects of the new rules.  Farmers and business people will now want to consider what other planning options may be available to them.  These might include insuring against a future IHT bill, or borrowing or selling part of a business or farm in order to reduce the taxable value of the property and realise a fund to pay any tax due. 

Before making any planning or other decisions, you should take advice as to how the proposed new rules may affect you and any trusts of which you are the settlor or trustee.  If you would like to do so, please get in touch with your usual Howard Kennedy contact, or a member of our Private Client team.    

Nothing in this client note constitutes legal advice to any person.