Trusts and the reform of APR and BPR

In the Autumn Budget 2024, the Government announced several reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) from Inheritance Tax (IHT). In particular, a new £1 million allowance will apply to the combined value of property that qualifies for 100% BPR, 100% APR or both – after the £1 million allowance has been exhausted, relief will apply at a lower rate of 50% to the combined value of qualifying agricultural and business property. These changes are set to come into effect from 6 April 2026.

It has been widely documented how these reforms will affect individuals but less has been said about how they will affect trusts. The Government recently published a technical consultation setting out how they intend to apply these reforms to trusts, and below is a summary. Please note that while there are various types of trust, this article focuses specifically on relevant property trusts.

There are three main events during the life of a relevant property trust that can result in an IHT charge, and these are dealt with in order below:

1. Entry charge

A person who makes a lifetime transfer into a relevant property trust (a ‘settlor’), is subject to an immediate IHT ‘entry charge’ at 20% of the gross value of that transfer after any reliefs, exemptions and available nil-rate bands have been applied.

For transfers of qualifying agricultural and business property into a trust before 6 April 2026, the trustees will not be subject to the £1 million allowance and continue to get unlimited APR and BPR, provided that the settlor survives 7 years from the date of transfer.

This is different if the settlor does not survive 7 years from the date of transfer, and the rules will be dependent on whether the transfer was made pre or post the Budget announcement.

Where the settlor dies after 6 April 2026 and within 7 years of making the transfer then:

• For transfers before 30 October 2024, unlimited APR and BPR relief will continue to be available on the failed transfer, meaning there shouldn’t be any additional IHT due as a result of the death.
• For transfers made after 30 October 2024, the failed transfer will be subject to the new £1 million allowance and there could be additional IHT due as a result of the death. In this case, the trustees would be liable for any IHT due.

For trusts set up on or after 6 April 2026, all transfers of qualifying agricultural and business property will be subject to the £1 million allowance and could, therefore, result in an IHT entry charge.

• Principal charge (or 10-year charge)

At each 10-year anniversary from the creation of a relevant property trust, there is a ‘principal’ charge of up to 6% of the value of the property in the settlement, after any reliefs and nil-rate band available have been applied.

For trusts set up before 6 April 2026, the new £1 million allowance will only apply to complete quarters which fall on or after 6 April 2026.

For trusts set up on or after 6 April 2026, the new £1 million allowance will apply to the principal charge from day one.

• Exit charge

When there is a distribution or disposition of relevant property from the settlement, trustees will pay a proportion of a 6% charge based on the length of time since the creation of the settlement, or the last principal charge date.

For qualifying agricultural and business property settled before 30 October 2024, the £1 million allowance does not apply to exits until the first 10-year anniversary after 5 April 2026.

From 6 April 2026, the £1 million allowance will apply to exits of qualifying agricultural and business property settled on or after 30 October 2024. These exits will reduce the £1 million allowance available at the next 10-year anniversary.

Anti-fragmentation

• All trusts set up and holding qualifying assets before 30 October 2024, will each have their own £1 million allowance.
• From 30 October 2024 there will be a single £1 million allowance for multiple trusts set up by the same settlor:
  • This will be allocated in chronological order, with priority given to the first settlement.
  • If two settlements are made on the same day, then the allowance is split proportionally between the settlements.
  • Allocation of the £1 million allowance is fixed at the outset. If a trust can no longer use its allocation of the allowance, then the unused allowance cannot be used by related trusts by the same settlor.

Introducing a ‘related’ property rule for multiple trusts by the same settlor

The Government is seeking views on extending the existing rules for valuing ‘related’ property from 6 April 2026, so that qualifying agricultural or business property settled by the same settlor across multiple trusts, can be connected for valuation purposes. If valuing property in the different settlements together gives a higher value than for each individual settlement, then the higher value will be used when calculating principal charges and exit charges.

If you have a trust or are thinking of creating a trust, it is important to take comprehensive advice, to understand how these reforms could affect you and, as always, Ensors are here to help.

Finally, it should be noted that all of the above is based on the Government’s technical consultation and the final legislation could change.