Reforms to Inheritance Tax reliefs: Is it the right time to set up a trust? 

At the Autumn Budget 2024, the government announced their intention to restrict ‘the generosity of agricultural property relief and business property relief’. Despite public uproar, it appears that the government will proceed with reforms from April 2026 that will expose numerous estates to additional Inheritance Tax. 

Currently it is possible to claim 100% business property relief (BPR) on qualifying business property, trading business and shares in an unquoted company, including shares listed on the Alternative Investment Market (AIM companies), 50% business property relief is available on a majority shareholding in a listed company and land used in a business and 100% agricultural property relief (APR) can be claimed on land occupied for the purposes of agriculture, together with appropriate buildings and farmhouses. This leaves most trading businesses, unquoted investments and farms fully exempt from Inheritance Tax. 

Proposed changes 

The 100% rate for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM, will be reduced to 50%. 

All other assets which qualify for the 100% rate of relief will continue to do so but the relief will be capped at the first £1 million of combined agricultural and business assets and will be reduced to 50% thereafter. Following protests by farmers, there have been some rumours that the government is considering  increasing the cap to £5 million so that smaller businesses and farms would not be subject to Inheritance Tax but no changes to the proposals have been announced. 

An option to pay Inheritance Tax by equal annual instalments over 10 years will be extended to all qualifying property, which is eligible for agricultural property relief or business property relief, regardless of the applicable rate of relief. 

How will it affect my estate? 

Currently, if you have assets that qualify for the relief at 100% rate, then depending on the extent of your other assets, your estate may not have to pay any inheritance tax at all. 

For example, an estate comprised of the following assets: 

• £1.5m worth of qualifying trading business 

• £300,000 of unlisted shares 

• £200,000 of other assets 

Will have no Inheritance Tax liability as the qualifying trading business and unlisted shares are covered by 100% BPR and the value of the other assets are under the nil rate band threshold. 

From 6 April 2026, the same business assets will not be fully covered by the Business Relief and the Inheritance Tax liability will be calculated as follows: 

• Trading business: £1,500,000 – (minus) £1 million allowance (100% relief) = £500,000 x 50% (relief) = £250,000 
• Unlisted shares: 50% of £300,000 = £150,000 
• Chargeable value of the estate: trading business £250,000 + unlisted shares £150,000 + other assets £250,000 = Total £650,000 
• Inheritance Tax due on: Chargeable estate     £650,000 – (minus) nil rate band (£325,000) = Total £325,000 
• 40% of £325,000 = £130,000 total Inheritance Tax due. 

Tröstler 

Setting up a trust to hold qualifying business and agricultural assets is one solution to minimise exposure to inheritance tax. Whereas putting other assets into a trust may attract an Inheritance Tax entry charge at 20% this does not apply to qualifying business and agricultural assets that continue to benefit from 100% BPR/APR. Any capital gains tax liability due in respect of the transfer of the assts into the trust can be deferred until the assets are sold. 

Any trusts set up before 30 October 2024 benefited from unlimited 100% relief if these held qualifying BPR/APR assets on creation and continue to receive unlimited 100% relief on exit charges until on or after 6 April 2026, after which the new rules and the £1 million cap will apply. This means that some trusts will become liable to Inheritance Tax every 10 years at a maximum rate of 6%. If any trustees are considering distributing qualifying assets, this should be done before 6 April 2026  to take advantage of uncapped BPR/APR. 

However, the changes do not mean that trusts will cease to be  a beneficial tool in reducing Inheritance Tax after April 2026. Any trusts created before 6 April 2026 remain benefiting from the uncapped BPR/APR (provided that person who created the trust survives for 7 years) and will have their own £1 million allowance that renews every 10 years. Such trusts will be liable to exit and 10-year anniversary charges, at a reduced rate of maximum 6% compared to 40% payable on death. 

Consequently, estates and trusts that include qualifying business or agricultural assets now require careful consideration. Many estates and trusts that currently have no Inheritance Tax liability, may be brought into the scope of inheritance tax from April 2026. If you are concerned and wish to discuss what you can do to minimise your exposure to Inheritance Tax, our Private Client department is happy to help you.