HMRC recently published a detailed Consultation on the proposed changes to Business Property Relief (BPR) and Agricultural Property Relief (APR), specifically as they relate to trusts. Natalie Iceton explains how the changes will operate and what individuals, personal representatives, settlors and trustees should be thinking about in light of these changes.
In last year's Autumn Budget, the Government announced changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) to be introduced from 6 April 2026. This includes the introduction of a new £1 million allowance to which 100% relief will apply, with any remaining qualifying property benefitting from a lower 50% relief.
What are the changes?
To date BPR and APR have provided generous tax reliefs for business and farm owners to enable these assets to be passed on to future generations with a 100% relief from Inheritance Tax (IHT) as long as certain qualifying conditions were met. The main changes which will take effect from 6 April 2026 are:
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£1 million allowance. For individuals there will be a new £1 million allowance on death on a combined value of business and agricultural property which qualifies fully for BPR and APR. This includes property transferred on death, gifts to individuals and to trusts made in the seven years before death, as well as qualifying interests in possession.
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50% relief after £1 million allowance used. Where the value of the BPR and APR property exceeds the £1 million allowance, this will be subject to relief at 50%. For example, instead of IHT being payable on this value at the 40% IHT rate, IHT will be paid at a 20% rate.
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BPR/APR property settled into trust before 30 October 2024 – each trust will receive its own £1 million allowance on a combined value of BPR and APR property. This is good news for existing trusts.
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BPR/APR property settled into trust on or after 30 October 2024 – the £1 million allowance will apply, but it will be shared between all trusts set up by the same settlor.
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The £1 million allowance for individuals will refresh every seven years in a similar way to the IHT nil rate band. This is welcome news, especially for younger individuals who may benefit from multiple £1 million allowance refreshes over their lifetime. However, any unused allowance cannot be transferred to a spouse or civil partner and will instead be wasted. Careful consideration will need to be given to making full use of all available £1 million allowances by considering gifting between spouses/civil partners, such gifts being exempt for IHT.
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For trusts, the £1 million allowance will refresh on every ten year anniversary. Any exits from the trust in the ten years prior to a ten year charge date will reduce the £1 million allowance and so careful planning will be required to understand any potential IHT charges ahead of each ten year anniversary, and how the tax will be funded. The calculations required on exit charges and ten year anniversaries are complicated and therefore specialist input will be required.
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Trusts which distribute property qualifying for BPR/APR before 6 April 2026 which results in an exit charge, will still qualify for full BPR relief and the £1 million allowance will not apply. This provides an opportunity to consider making distributions to beneficiaries pre 6 April 2026 or winding up trusts that no longer have a useful purpose, although other taxes including Capital Gains Tax would need to be considered.
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Gifts of BPR/APR property which were made before 30 October 2024 are not impacted by the new rules and will not reduce an individual’s £1 million allowance.
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Where an individual gifts BPR/APR property on or after 30 October 2024 to another individual there will be no IHT if the individual survives the gift by seven years, or if they die before 6 April 2026.
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Another welcome change is the extension of the payment by instalments option to property qualifying for BPR and APR which should help with funding IHT charges. Funding of IHT liabilities will be a key consideration and need to be planned for well in advance of any IHT events to minimise the impact eg on cash flows of businesses.
Anti-fragmentation rules and impact on valuations
New anti-fragmentation rules will apply for gifts of BPR/APR property into multiple trusts on or after 30 October 2024, meaning that related trusts will be amalgamated. This will not only mean that one £1 million allowance will be shared by all such trusts but it will also impact on the way shareholdings are valued. This is a change to the way valuation principles are applied to unquoted shareholdings for IHT and will lead to an increase in the value of shares which any liability will be calculated on extending the financial impact of the changes to more than the restriction to the reliefs. There are still some uncertainties around how these rules will apply which we are raising as part of our response to the Consultation.
Next steps
Clarity around the changes is welcome and there is a lot to think about for individuals and trustees to put themselves in the best position, including:
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Reviewing existing trusts to check they are 'fit for purpose'. For trusts before 30 October 2024 which are no longer required, there is an opportunity to wind these up before the next ten year anniversary and obtain 100% relief on assets qualifying for BPR/APR.
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Settling new trusts with BPR/APR assets before 6 April 2026 as these transfers will not reduce the settlor’s £1 million allowance providing they survive the gift by seven years, meaning 100% relief will potentially be available on settling qualifying assets.
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Putting in place a gifting strategy for individuals and their spouses/civil partners to take advantage of the refreshing £1 million allowance. Wills should also be reviewed to check how the £1 million allowance is used to ensure fairness between beneficiaries.
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Planning for funding of trust ten year charges. The calculations are complex and an exercise should be undertaken well in advance of the ten year charge date to calculate the tax and consider how it will be met, taking into account the instalments option. The extra tax burden for a business if it needs to fund the tax can put pressure on cash flows and result in additional tax on extracting the funds. It is prudent to take advice and get a plan in place early. Valuation advice will also need to be taken at the appropriate time.
With just over a year until the new changes come into force there is limited time to take advice and implement any planning such as creating new trusts, and so this should be on the agenda early in the new tax year to allow sufficient time.
How we can help
The Consultation document provides clarity over the main areas of uncertainty. The Consultation runs to 23 April 2025, please get in touch if there are any points you would like us to include as part of our response to HMRC, or if you would like to discuss the wider opportunities and any potential planning ahead of the changes.
