Consultation on inheritance tax changes provides clarity

HMRC recently published a looking at the proposed restrictions to be applied to business property relief (BPR) and agricultural property relief (APR). The consultation focuses on how the changes interact with existing trust tax legislation and provides clarity on how the new £1m allowance will operate on lifetime gifts, in the death estate and for trusts created in lifetime of a business owner. 

If there is a key takeaway, the consultation suggests that some business owners and farmers may be able to substantially limit their exposure to inheritance tax (IHT) with forward planning.

When this policy change was announced, reference was frequently made to a figure for married couples impacted by the proposed IHT relief changes. Based on the consultation proposals, it seems like this amount may be able to pass free of IHT. Going further, if both spouses were to settle some of their qualifying assets on trust and survive such a gift by more than seven years, they may be able to pass on around twice this amount without crystallising an IHT charge. 

Any such tax saving achieved through lifetime gifting to trusts would also need to take into account the costs and effort involved in establishing and maintaining trusts, as well as the wider tax implications of undertaking such planning, like the interaction with capital gains tax. The additional complexities from this planning could present significant complications to the ownership of business assets and operation of the business. 

In terms of the detail included in the consultation, it outlines that where lifetime gifts of qualifying property are made, the £1m allowance is utilised firstly against lifetime gifts and any balance is available to use against the death estate. Once seven years have passed from the date of a lifetime gift, the allowance essentially refreshes and is available again, but the allowance is not transferrable between spouses.  

For business owners, spouses should ensure that they each have sufficient business value to utilise their allowances. Lifetime gifting over a sustained period of time to move value down the generations looks attractive. Interestingly, there is no mention of changes to the current lifetime gifting framework which pulls gifts back into charge if the donor dies within seven years of the gift.  

A lifetime gifting strategy and sharing value between spouses and family members to maximise allowances can cause the ownership of a business to become fragmented. In some cases, with optimal family dynamics and strong governance in place, this might be a viable and attractive option.

However, for many families, there is uncertainty on who will inherit the business further down the line or parents are reluctant to make outright gifts to children. Control is important until the next generation is ready to take the reins. In these cases, family trusts are often used to incentivise the next generation yet defer a decision on business succession and for asset protection purposes.  

The consultation proposals on the interaction of the new rules and existing trust tax legislation are technically complex, and there are fundamental changes proposed to ongoing trust IHT calculations, meaning.  Any new trusts created by the same settlor on or after 30 post October 2024 will share a single IHT £1m business or agricultural property allowance, rather than having an allowance per trust, and there are important valuation rules mooted, which would combine the value of assets held in trusts created by the same settlor to prevent deliberately fragmenting value to access valuation discounts.

There are traps for the unwary in accelerating gifts. The business owner needs to ensure they retain a sufficient interest in the business to meet their income requirements. Taking too much income from a business that has been given away can negate the gift for IHT purposes. Once a trust holds an interest in a business, it will be subject to the trust IHT regime. Transfers into a trust should therefore only be made with eyes wide open.

The additional information in the consultation provides more clarity to allow business owners to review their ownership structures and succession plans before the changes come into effect on 6 April 2026. However, it is important to keep in mind that further changes may be made before these changes are finalised. It seems there remains an opportunity to use a trust vehicle to pass on significant value before the new rules come into play and going forward, with the trust remaining a valuable tool in holistic succession planning for family businesses.