With time marching on towards the IHT changes in April 2026, we look at the impact of these changes, and what you can do now.
At the Autumn 2024 Budget, it was announced that from April 2026 the Government would restrict the Inheritance Tax (IHT) relief available for agricultural and business property. Currently if you have assets in your estate that qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR), these may receive 100% relief from IHT, with no cap. From April 2026, that relief will be capped at £1,000,000, with the combined value of APR and BPR assets in excess of £1,000,000 only qualifying for 50% relief. This will create an effective 20% death rate for IHT on APR/BPR assets over the £1,000,000 allowance.
How to benefit from the changes in APR and BPR
The changes have reinforced the need for estate planning. The starting point is to ensure that you understand what your exposure to IHT will be, once the new rules are introduced in April 2026. You can then consider your options and the steps that could be taken to reduce your exposure with some effective planning. Even the Government accepts that people can respond to the new rules by changing ownership structures for estates, and the Office for Budget Responsibility expects people will change their behaviour to benefit from other reliefs and exemptions. So, what are the options?
Lifetime gifting
You could give away some of your assets in your lifetime, thereby reducing the amount of assets in your estate that would be chargeable to IHT when you die. If you give assets away outright to another individual, then this is classed as a potentially exempt transfer (PET). This needs to be an outright gift – if you reserve any kind of benefit in the asset, you might fall foul of the rules on gifts with reservation of benefit.
If you survive seven years from the date of the gift, then that gift falls outside your estate for IHT purposes. You need to consider that gifts are treated as a disposal for Capital Gains Tax (CGT) purposes. If the asset you are gifting is an asset liable to CGT, then you are treated as disposing of the asset at market value. If a gain arises you may have CGT to pay.
If you opt to make a gift into Trust, then the gift is a chargeable lifetime transfer (CLT). It is immediately chargeable to IHT, but the liability maybe £0 (see example below). Providing you survive seven years then there will be no further tax on the transfer into Trust. The Trust itself is subject to its own IHT regime {Link to other article on Trusts}. Although the transfer into Trust is a disposal for CGT purposes, in the same way as a gift to an individual. Where a transfer is a CLT, there is an option carry the gain into the Trust. This means that if a CGT liability would arise on this gift, you can elect for that gain to be taxed in due course, as and when the asset is sold by the Trustees. This transfers the CGT liability from you to the Trustees but it avoids a “dry” tax charge arising when you make the gift, as you would not have realised any cash to pay the CGT.
If we consider a case where you have never previously made any gifts, and you now gift £328,000 in cash into a Trust for the benefit of your children. The gift will be reduced by your £3,000 annual IHT exemption and the remainder will be covered by your IHT Nil Rate Band (NRB) of £325,000. This means that the IHT liability on the transfer into Trust will be £0. Once seven years have passed, you can consider making another gift into Trust, as the NRB “refreshes” every seven years.
If you die within seven years of either a gift to either an individual or a Trust, there may be IHT payable on the death estate.
What if the gifts mentioned were of assets qualifying for APR/BPR? The same principles will apply, in that the gift to an individual would be a PET, and therefore outside of your estate if you survive for more than seven years. If the gift was into Trust, then the IHT calculation for the CLT would take into account available APR/BPR relief, as well as the annual exemption and NRB. In this instance, you could consider a transfer of enough assets to utilise both the available NRB, annual exemption and the £1,000,000 BPR/APR allowance. Although the NRB refreshes every seven years, the £1,000,000 allowance for BPR/APR in Trusts will refresh every 10 years.
If you were to die within seven years of these gifts then there may be IHT payable on the death estate, although that may be reduced by some APR/BPR, providing that the asset gifted is still a qualifying asset at the date of death and is owned by the person it was gifted to (or if sold, the proceeds reinvested in a qualifying replacement asset).
There would be the same CGT considerations, irrespective of whether the assets gifted qualify for APR/BPR.
Death Estate
Until now it has been common for Wills to be written leaving the whole estate to the spouse on the first death. This is because any assets that pass to a spouse are exempt from IHT, and the NRB and Residence Nil Rate Band (RNRB) are transferrable, so you can utilise both spouses’ entitlements on the death of the surviving spouse.
The proposed £1,000,000 allowance on BPR/APR assets is not transferrable, and so if you have assets in your estate that would qualify for BPR/APR and you die first, leaving those assets to your spouse, then you will have wasted your 100% BPR/APR allowance. Therefore if, as a couple, you have more than £1,000,000 of qualifying assets (or they could be valued at more than £1,000,000 by the time you die), you should consider updating your Will to leave up to the available APR/BPR allowance to another beneficiary, thereby utilising the relief. This could be done by a specific legacy to an individual(s), or by leaving these assets in Trust.
Can I make gifts now to avoid the new rules?
Any gifts/transfers made between 30 October 2024 and 5 April 2026 will be subject to transitional rules.
If you make a PET in this period, and you survive seven years, then the gift will fall outside your estate for IHT purposes. If you die within seven years, and before 6 April 2026, then the new rules do not apply to that gift. If it was a gift of a qualifying BPR/APR asset, then 100% relief may be available on the failed PET. If you die within seven years, but on or after 6 April 2026, then the new rules will apply, and the failed PET will be subject to the £1,000,000 allowance for 100% relief on BPR/APR assets.
If you make a transfer into Trust in this period, then the cap of £1,000,000 will not apply when calculating IHT due on the CLT. Providing you then survive seven years, no further IHT will be due in respect of the transfer into Trust, and the value of that transfer will not be included for the purposes of determining the amount of £1,000,000 cap available for future CLTs.
If you die within seven years, and on or after 6 April 2026, then the new rules apply, and the IHT due at death on this transfer, will work in the same way as the failed PET. This will also be treated as utilising the £1,000,000 allowance, thereby reducing the allowance that will be available on any later CLTs or on the death estate.
What about gifts I made back in April 2024, are these affected by the new rules?
Any PETs or CLTs that were made before 30 October 2024 will not be affected by the new rules. They will be ignored for the purposes of determining the £1,000,000 allowance available for CLTs made after 30 October 2024.
Is it time to review your plans? For more information, please contact Karen Anderson.
