On 27 February 2025, the government released its consultation document on the most significant reforms to Inheritance Tax reliefs for agricultural and business assets that have been seen in a generation. The original announcements on the changes were made in the Autumn Budget on 30 October 2024. Currently, assets qualifying for agricultural or business property relief for Inheritance Tax (IHT) may qualify for unlimited relief at 100% of the value of the asset.
There had been uncertainty about how some of the changes will apply, particularly with regard to agricultural and business assets held in trusts, new transfers of agricultural and business assets to trusts, and transitional measures for transfers taking place between 30 October 2024 and 6 April 2026 (“the transitional period”).
The consultation document clarifies how the government intends the law to apply in these situations. Detail on how the new rules will apply is complex, but we have summarised some key points from the consultation document below:
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- Potentially exempt transfers (“PETs”) are gifts to an individual, chargeable lifetime transfers (“CLTs”) are generally gifts to trusts. PETs and CLTs of qualifying agricultural and business assets that were made prior to 30 October 2024 will not use up the £1 million allowance when determining the rate of relief available on death, or for gifts to trusts made after that date.
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- The £1 million allowance for individuals will apply to PETs of qualifying agricultural and business assets made in the transitional period if the donor dies within seven years of making the gift and on or after 6 April 2026. If the donor were to make a PET during the transitional period but dies before 6 April 2026, the new rules will not apply, and full relief will be available.
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- 100% relief will continue to be available for gifts of qualifying agricultural and business assets to trusts before 6 April 2026, irrespective of their value. However, it should be noted that if the donor dies within seven years and on or after 6 April 2026, the value of the property transferred into trust will be subject to IHT on the donor’s death, and the £1 million allowance will apply in calculating the available relief.
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- After 6 April 2026, an individual’s £1 million allowance will reset every seven years, in a similar way to the IHT nil rate band (“NRB”), meaning an individual can gift up to £1.65 million of qualifying assets to a trust every seven years without incurring any entry charge. £1 million will be relieved by the allowance and £650,000 by a mix of 50% relief and the £325,000 nil rate band.
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- Trusts set up by the same settlor after 30 October 2024 will share a £1 million allowance to offset against ongoing trust charges (anniversary and exit charges). The single allowance will be allocated to trusts in chronological order, with the allowance being split equally where two trusts are set up on the same date. Trusts created prior to 30 October 2024 will each have their own £1 million allowance.
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- The trustees’ combined £1 million allowance will refresh every 10 years when calculating anniversary charges.
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- The £1 million allowance cannot be transferred to a spouse on death. It is therefore crucial that farmers and business owners review their wills to make sure their allowance is used tax-efficiently (for example, by transferring £1 million worth of business or agricultural property to a trust on the death of the first spouse).
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- Many trusts created prior to 2006 or created under a will where a beneficiary has a right to the income of the trust, are taxed differently to most other trusts. These Qualifying interest in possession (“QIIP”) trusts are not subject to 10-year charges and exit charges. QIIP trusts are considered part of the beneficiary’s estate and on death, the estate of the deceased will share the £1 million allowance with any QIIP trust in which the deceased retained an interest.
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- The government has confirmed that IHT payable on qualifying agricultural and business assets can be paid over ten years in interest-free instalments.
Now is a good time to review your position and seek professional advice to ensure your affairs are structured correctly to help minimise your inheritance tax exposure.
If you have any questions or would like professional assistance with your inheritance tax planning, please get in touch. Alternatively, please contact one of our specialists in this area, Simon Harmsworth, Iain Dowling or Alice Johnson.
