Action required: A possible response to IHT changes must be completed before 6 April

The 2024 Budget Statement included some significant changes to Agricultural Property Relief (APR) and Business Property Relief (BPR). Several further announcements followed, some of which amended previous ones. So let’s start by re-capping the current position and how it will change from 6 April this year.

Currently, APR and BPR mean that some properties and assets are not included when calculating an Inheritance Tax bill on the owner’s death. In some other cases, 50% relief applies – but in many, 100% relief can be claimed. There is no upper limit on the amount that can be exempt under these reliefs.

From 6 April this year, however, there will be a limit on these exemptions: £2.5 million per person. This will be transferrable between spouses and civil partners, so the limit is £5 million per couple on the second death. Inheritance Tax is payable on the death of the owner of the assets or, if assets are put in a trust, where they exceed this limit.

There is still an opportunity to plan for these changes, but it must be completed before the new rules come into force.

How to plan for upcoming IHT changes

Someone who owns qualifying business or agricultural assets that might be liable for Inheritance Tax can gift them into a lifetime discretionary trust and may appoint themselves as a trustee.

These trusts currently benefit from ‘unlimited 100% entry relief’ – meaning that there is no limit to the value of assets that can be put into them without immediately incurring an Inheritance Tax charge. This enables the owner to take advantage of the current uncapped reliefs, while also retaining effective control over the assets. (After 6 April, any assets over £2.5 million will face an immediate 10% tax charge.)

It must be remembered that the trustees will still face an Inheritance Tax charge on the tenth anniversary of the inception of the trust, the twentieth, and so on; and also when assets are distributed to beneficiaries. This will be up to 3% of the value of the trust fund that exceeds the £2.5 million allowance.

And there is another rule that you need to be aware of: to achieve the full tax benefit, the donor needs to survive for seven years after the gift is made. (If they die before that, the full rate or lower rates may apply depending on the timing.) One way to mitigate this risk is to take out a life insurance policy that covers the necessary seven-year term.

Trusts: The basics

Anyone who is considering using a trust as part of their estate planning should have a good basic understanding of what this entails. Here’s a brief summary.

When you set up a trust, the trustees become the legal owners of assets held within the trust. They must take responsibility for managing these assets while exercising certain duties, known as their ‘fiduciary duties’. In the case described above, the person who owns the assets will want to appoint themselves as a trustee, but it may well be advisable to appoint others too. If so, it is crucial that you select people who understand the role; are willing and able to carry it out effectively; and will work well together.

The trust deed sets out the terms of your trust, such as who your trustees and beneficiaries are, the trust purposes, and what powers the trustees have – so preparing it is a critical task. It is important to consider the purposes of the trust and what it is that you’re trying to achieve, to ensure that the drafting meets your aims.

You can then transfer assets to your trustees to hold as trust property. You will then have to register the trust with HMRC’s Trust Registration Service. Ongoing record-keeping will also be required throughout the trust’s life – for example, financial accounts and appropriate records of trustee decisions.

Specialist advice

Several aspects of setting up and running a trust may well benefit from expert advice. Our Private Wealth and Tax team specialises in this and would be very happy to help you, so don’t hesitate to get in touch.

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