IHT business relief: Why trusts are important

The changes to Inheritance Tax Business Reliefs and Agricultural Reliefs (BR and AR) from 6 April 2026 are the most seismic change to business owner’s succession planning for a generation. So, it is important for business owners to consider how the changes impact their plans.

Does your business qualify?

Although the rates of BR and AR relief are changing, the basic qualifying rules are not - specific conditions need to be met. If the finances or structure of your business have changed, will you still qualify or will relief be restricted? We can review your business and advise you on any remedial action you should take.

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Why hold business assets in a trust?

Owning a business and wanting to pass it 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. The key benefits include: 

  • Maintaining control of assets 
  • Protecting the stability of the business
  • Enabling future flexibility 
  • Maximising use of the £2.5m BR/AR allowance 
  • Keeping part of the future growth in value if the business outside your estate for IHT purposes.
 

For example, it is common to settle shares in a business into a trust before the business is sold while tax charges on entry into the trust can be managed.
 

Rules for trusts from 6 April 2026

From April 2026, the first £2.5m of combined agricultural and business property will continue to receive 100% relief, with 50% relief on amounts over £2.5m. The £2.5m 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 £2.5m 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 £2.5m 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 are able to gift business relief qualifying unquoted shares, up to a value of £2.5m, 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 AR or BR, 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 £2.5m 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 £2.5m 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.


Each person will have a £2.5m allowance. It was initially proposed that any unused allowance will not be transferable between spouses. However, the final legislation confirms that any unused portion of the allowance at death can be transferred between spouses and civil partners. 

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

If you have already put plans in place based on the initial proposal for the allowance not being transferable between spouses, it’s worth reviewing them to see if the introduction of a transferrable £2.5m allowance has an impact on the IHT bill you are budgeting for.

Any gifts and settlements you made from 30 October 2024 up to 5 April 2026 fall under the old rules so, in most cases, they will not have triggered 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 £2.5m plus any IHT Nil Rate Band available. There would also be potential IHT on death within seven years.

Trusts will receive a combined £2.5m allowance in addition to the settlor’s allowance for business assets still held in their name. However, if you had settled multiple trusts before 30 October 2024, each of those trusts will have its own £2.5m allowance. To qualify for the £2.5m 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 qualifying ownership period is ignored. Anti-fragmentation rules will not allow this for trusts created from 30 October 2024 onwards; they will share the £2.5m lifetime allowance for trusts with the same settlor.

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 until that anniversary date, which could be as far away as 2035.

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.

Qualifying assets settled into trust in the transitional period from 30 October 2024 up to 5 April 2026, with a value of over £2.5m, 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 £2.5m trust allowance and the trust’s NRB, broadly £325,000 per settlor.

Once the £2.5m 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 £2.5m 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.

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. In such cases, owners should consider use of insurance cover to tax-efficiently fund any possible future IHT charges.

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

Action

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

What to do now

We now have clarity on how the post 6 April 2026 rules work, so now is a good time to consider your future intentions and wider estate planning objectives and what actions you might usefully take with existing trusts and in using a trust in future. The forthcoming changes to IHT on pensions from April 2027 should also be factored into your plans.

Please get in touch if you have any specific questions - our team will be happy to help.

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