IHT business relief: Why trusts are important

The planned reforms to IHT Business Reliefs and Agricultural Reliefs (BR and AR) represent the most seismic change to business owner’s succession planning for a generation. The changes will take effect from April 2026, so it is important for business owners to consider immediately how the changes impact their plans.

 

Reforms for trusts: business owners’ options

The Government has published a technical consultation, as promised, that focuses on how the rules will apply to trusts.

But why are the rules for trusts important?

Owning a business and wanting to pass this on to family is often the primary driver for creating a trust as it can be used to help protect and enhance your family’s future finances while maintaining control of assets and allowing future flexibility. It is also common to settle shares in a business into a trust before the business is sold while tax charges on entry can be managed.

The consultation document has provided some welcome technical clarifications. However, the key takeaway is that there are actions business owners can usefully take now before the new rules come into effect from April 2026.

Action checklist for IHT Business Relief

• Check your business assets still qualify for IHT business relief and determine how much will be available under the new rules, undertake a review now
• Speak to your family and advisers to review your succession plans for the business
• Consider any action needed before 6 April 2026, in particular consider whether transfers in or out of trust are advisable
• Review and update your will as needed
• Consider insurance cover to tax-efficiently fund any possible future IHT charges
• Review your pension strategy, in light of changes to IHT on pensions from April 2027.
• Non-doms with business interests will also need to consider the domicile reforms from April 2025

Key technical issues

Amount of relief

From April 2026, the first £1m of combined agricultural and business property will continue to receive 100% relief, with 50% relief on amounts over £1m. The £1m allowance will not apply to shares traded on but not listed on the markets of a recognised stock exchange such as AIM shares which will qualify for only 50% relief. For more information you can read our IHT Business Relief - How it works article.

The £1m will effectively be a ‘lifetime allowance’, covering the estate on death, failed gifts in the seven years before death and lifetime transfers into trust. We now know that the £1m allowance will refresh on a rolling basis every seven years for lifetime transfers, in the same way as the nil rate band. Lifetime gifts and settlements made more than seven years before your death will continue to be excluded from IHT, with taper relief available to progressively reduce the IHT rate between three and seven years.

Option

Every seven years during their lifetime, business owners will be able to gift business relief qualifying, unquoted shares up to a value of £1m to a trust, or directly to family members, without triggering a lifetime IHT charge. The trust may be subject to a ten-year anniversary charge and exit charges, to the extent the value is above the trust’s available Nil Rate Band (NRB) and is not covered by agricultural property relief or business relief, but payment of the tax could be spread.

No changes or questions were raised in the consultation regarding the amount of relief as already announced so it seems that the £1m limit is fixed. However, for IHT on death, clarification is still needed on how the £1m allowance is allocated where an individual’s will gifts business assets via both specific legacies and the residue of their estate. The question is which beneficiary would get the allowance and pay less IHT?

Action

It is important to review your will and any existing plans for passing on your business. You need to be sure your plan is still tax-efficient and will still be practical for your beneficiaries to carry on the business?

Spouses

Each person will have a £1m allowance as explained above, but it will be non-transferable. The consultation makes no change to this initial proposal. We believe that this is a missed opportunity to simplify estate administration, as well as align with the current rules for the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB).

However, the current spousal exemption remains unchanged, so assets can pass to a UK, long-term resident spouse free of IHT during lifetime or on death.

Possible action

It is common for a trust to be set up for a surviving spouse with a life interest in the business assets only, to give certainty of the ultimate beneficial recipients of the assets. You should check whether this is still tax efficient. A lifetime transfer of business assets to a spouse will be free of IHT and can ensure that as a couple you both each hold £1m of qualifying assets once the required two-year ownership period is established.

Transitional rules

It is disappointing that the consultation document makes no change to the transitional rules that can affect gifts of business assets made before April 2026. We still believe that these transitional rules should be adapted to limit the impact on family businesses where an older individual has personally owned the BR/AR qualifying assets for a long period.

Gifts and settlements you make from 30 October 2024 up to 5 April 2026 initially fall under the current rules so, in most cases, they can be made without a lifetime IHT charge. However, if you die after 5 April 2026 and death is within seven years of that transfer, any resulting IHT liability will be calculated by reference to the new rules.

In comparison, transfers made after April 2026 will fall completely under the new rules and so lifetime IHT would be due on gifts, such as settling trusts, where the value exceeds £1m plus any IHT NRB available. There would also be potential IHT on death within seven years.

Possible action

Making gifts of business assets before April 2026 should be considered so that this can be carried out without a lifetime IHT charge. However, it may be sensible to arrange insurance cover for the potential IHT charge on death.

Trusts

Trusts will receive a combined £1m allowance in addition to the settlor’s allowance for business assets still held in their name. However, where a settlor has settled multiple trusts before 30 October 2024, each of those trusts will have its own £1m allowance. Anti-fragmentation rules will not allow this for trusts created from 30 October 2024 onwards; they will share the £1m allowance. We believe that there are some flaws in the way that the consultation suggests that these rules will work.

Business assets already held in trust

Trusts settled before 30 October 2024 will qualify for business relief under the currently uncapped rules up until the next ten-year anniversary of each trust’s creation. This means an exit before a trust’s next 10-year anniversary which falls on or after 6 April 2026 will attract unlimited 100% relief on qualifying property.

However, there will be additional complexity during the years the transitional provisions may apply as exit charges following a 10-year anniversary will be calculated under two different methods depending on whether the anniversary arose pre or post 6 April 2026.

Action

Trustees of pre-30 October 2024 trusts should consider whether transferring qualifying business assets out of the trust while 100% relief is available is possible and appropriate without damaging long-term plans for the business.

Trusts created after 29 October 2024

Qualifying assets settled into trust in the transitional period from Budget Day up to 5 April 2026, with a value of over £1m, will not trigger an immediate charge to IHT, unlike trusts created from 6 April 2026 onwards. Such trusts will be liable to IHT 10-year anniversary charges at 3% on the value of qualifying assets above the £1m trust allowance and the trust’s NRB, broadly £325,000 per settlor.

There are also several areas where clarification is needed on the use of the trust £1m allowance. For example, it appears that once the £1m allowance is allocated to a post 30 October 2024 trust that it will be used up for the life of the settlor, even if that trust is wound up or no longer has qualifying property.

Similarly, where a single trust is used by multiple settlors, for instance to reduce the administrative burden, it is not clear whether each transferor could bring up to £1m allowance for the trust. In addition, the way the £1m allowance is applied to multiple exits of qualifying property of different values on a single day is not clear.

Action

As part of your estate planning, consider if establishing a trust for your family before April 2026 can help meet your objectives.

Payment of IHT

The option to pay IHT by equal annual instalments over ten years, interest-free, will continue to be available whenever qualifying agricultural and business property is liable to IHT ie on lifetime and death tax, ten-year charges for trusts and trust exit charges. This is good news but there will still be situations where business assets may need to be sold to finance the instalment payments. In our response to the consultation, we have asked for clarification of the tax implications of a share buyback to fund IHT.

Action

Consider how any potential IHT can best be funded, particularly where the only available source of funds is the business.