A STUDY IN GIFTING – WHAT NOW FOR ASSETS THAT QUALIFY FOR BUSINESS AND AGRICULTURAL RELIEF?
Budget 2024
Last autumn’s Budget announced a maximum allowance of £1m per person for qualifying business and agricultural assets that will receive 100% IHT relief with effect from 6 April 2026. 50% relief would now be applied to any amount in excess of the allowance giving an effective 20% IHT rate on this amount (half the usual 40% IHT rate). The 100% relief will be applied proportionately across qualifying assets.
Shares listed other than on a recognised stock exchange (e.g., AIM shares) will not qualify for the £1m limit so that only 50% of any holding will now qualify for IHT relief.
Consultation paper, February 2025
The HMRC Consultation issued on 27 February 2025 (Reforms to Inheritance Tax agricultural property relief and business property relief: application in relation to trusts – GOV.UK) stated that the £1m allowance will replenish every seven years for individuals (and every ten years for trusts) but will not be transferable between spouses or civil partners. Trusts in existence before 30 October 2024 will have their own £1m allowance while those established by the same settlor after 30 October 2024 will share the £1m allowance in chronological order.
Gifting strategies should therefore be considered to make use of multiple £1m allowances. Gifts to spouses will be exempt while other Potentially Exempt Transfers (PETs) will be possible up to £1m, but death (if after 5 April 2026) within seven years will be a failed PET with the new rules applying to any value in excess of the allowance.
Gifting qualifying assets into trust
The IHT impact of gifting qualifying assets into trust will depend on when the trusts were established and when the gifts were made. The following table summarises the IHT position in three different regimes.
The Comparative Table: IHT Position for Placing BR/AR Assets into Trust
| Key Assessment Point | Regime 1: Pre-30 October 2024 | Regime 2: 30 Oct 2024 – 5 Apr 2026 (Transitional) | Regime 3: From 6 April 2026 (New Regime) |
|---|---|---|---|
| Immediate IHT on Creation of Trust (CLT) | No IHT charge. Unlimited 100% BR/AR reduced the value of the gift to zero. | No immediate IHT charge. Unlimited 100% BR/AR remains available for the initial transfer. | IHT at 20% on value exceeding the settlor's £1m allowance and available NRB. |
| IHT on Settlor's Death Within 7 Years | No IHT charge. Gift brought into death estate calculation, but 100% BR/AR is available. | High-risk period. If death occurs before 6 Apr 2026, old rules apply (no IHT). If death is on or after 6 Apr 2026, the new £1m allowance is applied retrospectively to the gift, potentially creating a significant IHT liability on death. | The gift is re-assessed at the 40% death rate. The £1m allowance used is counted against the individual's allowance on death. The value in excess of the allowance receives 50% relief. |
| IHT on 10 Year Anniversaries (TYAs) | Value of trust property is zero at the first TYA after 5 April 2026. Subsequent exits reduce the £1m available for future TYAs. | A charge of up to 3% (i.e., 6% max rate with 50% relief) applies to the value of qualifying assets exceeding the trust's allowance. Exits after 5 April 2026 will reduce the available allowance for future TYAs. | A charge of up to 3% (6% max rate with 50% relief) applies to the value of qualifying assets exceeding the trust's allowance. Exits from the trust will reduce the available allowance for future TYAs. |
| IHT on Asset Distributions (Exit Charges) | No charge on exit of qualifying assets up to first TYA. Exits after the second TYA will be subject to the effective rate linked to the previous TYA charge rate (where applicable). | Exits before 6 Apr 2026 are under the old rules (no charge). Exits after 5 April 2026 will be subject to the effective rate linked to the previous TYA charge rate (where applicable). | Exits of qualifying assets exceeding the trust's allowance will be subject to the effective rate linked to the previous TYA charge rate (where applicable). |
| Availability & Application of £1m BR/AR Allowance | Applies to second and subsequent TYAs. | Not applicable to the initial transfer but applies retrospectively on death within 7 years of transfer date after 6 April 2026. | A £1m allowance per individual (refreshes every 7 years) and per trust (refreshes every 10 years) for 100% relief. |
| Application of Anti-Fragmentation Rules | Not applicable. All trusts of the same settlor have their own £1m allowance. | Applicable. All trusts settled by the same settlor on or after 30 Oct 2024 share a single £1m allowance. Applied chronologically. | Applicable. All trusts settled by the same settlor on or after 30 Oct 2024 share a single £1m allowance. Applied chronologically. |
With the new rules coming into force in less than eight months, decisions about how to rearrange assets qualifying for BR and AR to mitigate potential increases in IHT need to be taken soon. Fragmentation of ownership to be able to use multiple £1m allowances may be appropriate, and optimising the use of trusts for qualifying assets will enable further allowances to be utilised. However, we await the response to the consultation and the draft legislation to provide more clarity.
If you have any questions, please feel free to contact the Technical Services team.
All information is based on our understanding and interpretation of applicable law and regulation.
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