Reviewing your inheritance tax
Why is now a good time to do an inheritance tax review? In the landmark Autumn Budget on 30 October 2024, the Chancellor revealed the most significant reforms to Inheritance Tax (IHT) reliefs for agricultural and business assets that have been seen for decades.
On 27 February 2025, the government published its consultation document. The changes are to take effect from 6 April 2026 with some transitional rules coming into force for the period 30 October 2023 to 6 April 2026 (the transitional period).
There has 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 into trusts, and measures for transfers taking place in the transitional period.
The consultation document clarifies how the government intends the law to apply in these situations and invites comments on the technical application of these changes when calculating the IHT charges on trusts. Details on how the new rules will apply are complex, but we have provided a high-level overview of some of the main points from the consultation document below:
Individuals
- Individuals will have a £1 million allowance that covers both qualifying agricultural and business assets. Where the individual holds multiple qualifying assets, the allowance will be apportioned across them.
- The £1m 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 on their death.
- 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).
- 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 applicable to gifts out of trust made after that date.
- The £1 million allowance for individuals will apply to PETs of qualifying agricultural and business assets made during the transitional period, if the donor dies within seven years of making the gift and on or after the 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.
- 100% relief will continue for gifts of qualifying agricultural and business assets to trusts made 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 when calculating the relief.
Trusts
- Trusts set up by the same settlor after 30 October 2024 will share a £1 million allowance to offset against periodic trust charges (ten-year and exit charges). This is intended to prevent individuals from settling assets into multiple trusts to reduce their IHT. 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.
For example, if £325,000 of qualifying assets were settled into trust 1 (of 2), the share of the £1 million allowance for trust 1 would be £350,000. For trust 2, if there was £650,000 of qualifying assets settled, the share of the £1 million allowance would be £650,000, leaving no remaining allowance for any further trusts created.
The trustees’ allowance is fixed from the start and cannot be transferred to another trust created by the same settlor.
Trusts created prior to the 30 October 2024 will each have their own £1 million allowance.
- The trustees’ combined £1 million allowance will refresh every ten years when calculating anniversary charges.
- Many trusts created prior to 2006, or created under a will where a beneficiary has the right to the income of the trust, are taxed differently to the majority of other trusts. These qualifying “interest in possession” (QIIP) trusts are not subject to ten-year charges or exit charges. QIIP trusts are considered part of the beneficiary’s estate and on death, the deceased’s estate will share the £1 million allowance with any QIIP trust in which the deceased retained an interest.
- 18-25 trusts are trusts set up for minors or young individuals who are bereaved by the death of a parent and who will receive their share of the trust assets by the age of 25. To avoid younger siblings being at a disadvantage, a £1 million allowance will be available on transfers to each beneficiary.
What should you do?
The government has confirmed that IHT payable on qualifying agricultural and business assets can be paid over ten years via interest-free instalments.
As with any planning, other taxes should be considered together with potential reliefs available to individuals and trustees.
Now is a good time to review your current position and potential exposure to IHT (and other taxes) under the new regime, and seek professional advice to ensure that your affairs are structured correctly to help minimise your tax exposure.
If you would like to review your inheritance tax, see how your tax planning specialist can help here.
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