IHT business relief: Why trusts are important

The upcoming reforms to Inheritance Tax Business Reliefs and Agricultural Reliefs (BR and AR) represent the most seismic change to business owner’s succession planning for a generation. The draft legislation the Government published on 21 July 2025 confirms these 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 draft legislation, that details 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 Government confirmed their proposals in the draft legislation and, unfortunately, despite consultation responses from professional and industry groups, there have been no significant amendments. Therefore, 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 that 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  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, read IHT Business Relief - How it works article.

The £1m will effectively be a ‘lifetime allowance’, covering the estate on death, failed gifts and lifetime transfers into trust in the seven years before death. 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 on death, with taper relief available to progressively reduce the IHT rate between three and seven years.

Your Options

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 by annual instalments over ten years.

If an estate or same day lifetime transfer includes more than one qualifying asset, the £1m allowance will be allocated between the assets based on the proportion of their value. 

Action

It is important to review your will and any existing plans for passing on your business. It may be beneficial for the business to pass under a specific legacy to a beneficiary other than a surviving spouse, to maximise the use of an individual's £1m allowance. 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 has now been confirmed it will not be transferable. Although this seems to be a missed opportunity to simplify estate administration, and align it to the current rules for the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) - it does mean that lifetime planning actions likegifting are even more important for business owners. The 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

You should consider making gifts of business assets before April 2026 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.

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.

The rules for trusts

Trusts will receive a combined £1m allowance in addition to the settlor’s allowance for business assets still held in their name. However, if you have settled multiple trusts before 30 October 2024, each of those trusts will have its own £1m allowance. To qualify for the £1m allowance, a trust settled before 30 October 2024 must have contained some business or agricultural property at that date which qualified for 100% relief. For this purpose, the two-year ownership period is ignored. Anti-fragmentation rules will not allow this for trusts created from 30 October 2024 onwards; they will share the £1m lifetime allowance for trusts with the same settlor.

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 last 10-year 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 up to 3% on the value of qualifying assets above the £1m trust allowance and the trust’s NRB, broadly £325,000 per settlor.

Once the £1m allowance, or a portion of it,is allocated to a post-30 October 2024 trust, it will be used up for the life of the settlor, even if that trust is wound up or no longer has qualifying property.

Where a single trust is used by multiple settlors, for instance to reduce the administrative burden, each transferor could bring up to £1m allowance for the trust. Where there are multiple exits of qualifying property of different values on a single day, the allowance allocated in proportion to their value. 

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 i.e. 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. To date, no further clarification of the tax implications of a share buyback to fund IHT has been provided.

Action

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