Inheritance tax reform: HMRC publishes consultation on agricultural and business property

The Autumn 2024 Budget Day announcements have driven a horse and cart through capital tax planning that had been the status quo for many years. Detail published by the Government on 27 February in a consultation paper provides some further clarification on how the Budget Day changes are intended to operate, though this has done little to alleviate concerns among farmers, landowners, and business owners about the significant impact these changes will have on their livelihood.

We have taken the key points from the consultation paper and provided some insight to help you navigate the complexity. Being a consultation, the key points are only proposals by HMRC rather than legislation, and responses to the consultation may steer the direction of the final legislation. 

• Helpfully, the consultation proposes that Potentially Exempt Transfers (PETs) and gifts into trust made before the Budget will continue to be subject to the current regime, meaning they will continue to attract uncapped 100% agricultural property relief (APR) and business property relief (BPR), even for deaths after 5 April 2026 which occur within seven years of making the gift
• The consultation proposes that trusts established before the Budget will transition to the new regime on the next ten-year anniversary after April 2026. Ten-year anniversaries before April 2026 will continue to attract uncapped 100% APR/BPR and will not impact the availability of the £1m allowance. Distributions made before the first ten-year anniversary after April 2026 will similarly attract uncapped 100% APR/BPR relief. This means that there may be more time to distribute qualifying APR/BPR assets from trusts that were in existence before the Budget

Individuals – the consultation proposes that, similar to the Nil Rate Band (NRB), the £1 million allowance will refresh every seven years, allowing lifetime gifts of qualifying property up to £1 million in value to attract 100% APR/BPR. It applies chronologically for lifetime gifts made in the seven years before death meaning the £1m allowance may not be available on death if it has been utilised in the previous seven years on lifetime gifts. Unhelpfully, the £1m allowance will not be transferable between spouses, which is likely to cause unnecessary additional compliance burdens for individuals as well as HMRC. We expect this to be heavily criticised in the consultation responses.

Individuals who establish a trust after Budget Day but before 6 April 2026 will be eligible for uncapped 100% APR/BPR on qualifying assets going into the trust, provided they survive for seven years from the date the trust is established. If an individual dies after 6 April 2026 but within seven years of the transfer, APR/BPR will be restricted to 50% relief for amounts in excess of the £1m allowance.

Trustees – the consultation proposes that on a trust’s first ten-year anniversary charge arising after 6 April 2026, the £1m allowance will only apply to the period after 6 April 2026. This means that trusts with ten-year anniversaries falling soon after April 2026 will largely be subject to the current more beneficial regime. Subsequent ten-year charges will follow the new regime, with the trustees’ £1 million allowance refreshing on each ten-year anniversary, reduced by distributions in the preceding 10 years.

• Distributions before 6 April 2026 – distributions of qualifying assets will continue to attract uncapped 100% APR/BPR and will not use up trustees’ £1m allowance
• Distributions after 5 April 2026 but before trust’s first ten-year anniversary – distributions of qualifying assets will reduce the £1m allowance available at the next ten-year anniversary
• Distributions after 5 April 2026 and after the trust’s first ten-year anniversary – distributions of qualifying assets will reduce the £1m allowance on the next ten-year anniversary. The calculation of the inheritance tax rate will be based on gross asset values (so no APR/BPR considered) for all distributions following the first ten-year anniversary post 6 April 2026, effectively meaning a maximum 6% effective tax rate on distribution

A positive suggestion in the consultation refers to the calculation of the first ten-year anniversary charge after 6 April 2026 for APR/BPR qualifying property settled on or after 30 October 2024. It had been widely rumoured that the April 2026 date would be a ‘cliff edge’ such that any anniversary charge arising on or after 6 April 2026 would be subject to the new rules in its entirety. However, the proposed suggestion is that the new rules on the £1m allowance would only apply to complete quarters falling on or after 6 April 2026. 

What is not clear however is whether or not this proposal also applies to trusts settled before 30 October 2024 and we hope clarity will be sought in consultation responses.

As outlined in the Budget 2024 announcements, a single £1 million allowance will apply to transfers into trust by the same settlor after 30 October 2024. The consultation proposes that each trust will get a corresponding fixed allocation of the £1m allowance which will be applied chronologically, or apportioned if settled on the same day.

The allocation will be fixed for the trust’s lifetime, and if a trust can no longer use its allocation (for instance because assets have been distributed) any unused allowances cannot be transferred between related settlements.

So, whilst an individual may make £1m gifts of qualifying APR/BPR property to a trust every 7 years with no inheritance tax charge, the recipient trusts will only have one £1m allowance to use between them for trust inheritance tax events - with any excess value subject to 50% APR/BPR relief.

Related property concept – the Government is consulting on whether or not to impose a higher valuation for assets spread across multiple trusts to prevent individuals from taking advantage of minority discounts.

Where inheritance tax is due on agricultural and business property this can often be paid in ten equal annual instalments free from interest.

The consultation states that the Government will extend the option to pay inheritance tax by equal annual instalments over 10 years, interest-free, to all property which is eligible for agricultural property relief or business property relief, regardless of the applicable rate of relief. This may be attractive for some given the current rate of interest for unpaid inheritance tax at 7%.

• Non-transferable allowance – as noted above, the £1m allowance is not transferable between spouses
• Value of the allowance – there was nothing in the consultation about increasing the allowance above £1m, as many commentators have recommended
• Older/infirm taxpayers – similarly there was nothing in the consultation regarding any provisions for individuals who would struggle to plan on making gifts and surviving 7 years

While the consultation did not have any specific comments or questions on these aspects, we expect to see continued lobbying for these points to be considered and addressed.

The consultation, which we will be responding to, closes on 23 April 2025. The Government will then publish a response document and carry out a technical consultation on draft legislation for these changes later this year.

APR and BPR are very valuable reliefs, and with significant change on the horizon now is the time to review your IHT position and succession plans, including any current trust arrangements.

Please get in touch with your usual contact or any of the contacts listed to discuss this further.

Approval code: NTEH7032510