Inheritance Tax on Trusts, technical update March 2025

HMRC have now released their consultation document on the proposed changes announced last year in the Autumn Budget.

This article covers the proposed changes set out in the 2024 Budget and the further information we now know from the consultation document.

From April 2026 there are restrictions on BPR and APR relief for Trustees.

Currently, trust assets which qualify for 100% relief, escape any inheritance tax (IHT) charge on the trusts ten-year charge and on any proportionate/exit charges (which arise when capital distributions are made from the trust).

From 6 April 2026, each existing trust in place on budget day (30th October 2024) will have its own £1m allowance. This means that assets qualifying for 100% BPR or APR, will qualify for relief up to £1m. Any value in excess of £1m will only qualify for 50% relief. Trustees who have previously escaped IHT liabilities may now find themselves with an IHT charge on the first ten-year anniversary following 6 April 2026 and any exit charges thereafter. As a reminder, the rate of tax at a ten-year charge is a maximum of 6%.

Where the existing 100% relief applied, this relief will still be applied in full for assets within the £1m allowance, except for shares designated as not listed on the markets of recognised stock exchanges such as AIM, where the relief will be reduced to 50% and will not be affected by the new allowance. This change also comes into effect from April 2026.

UPDATE: For 10- year charges on pre-budget trusts arising before 6th April 2026, the old rules will remain, i.e. there will be no restriction to the relief of APR and BPR. For 10-year charges arising post 6^th April 2026, the proposed calculations will deduct the full £1m to calculate a tax rate and then this tax rate is adjusted for the period arising prior to 6^th April 2026. The consultation includes case studies but these are limited, so it is not yet clear how calculations for trusts with mixed assets (BPR/APR and non BPR/APR) will work.

For the calculation of exit charges, there is also a planned change. The calculation of IHT charges within a trust are complex but essentially, the current position for any exit charges in the first ten-years of a trust, the rate to be applied is recalculated without the reference to BPR/APR property. Essentially this means that trusts created with BPR/APR assets, which then lose their IHT relief status prior to an exit, could not be distributed from the trust IHT free. This differs to the way exit charges are calculated after the first ten years. Exits after the first ten-year charge are calculated with reference to the tax % applied at the previous ten-year charge. This would mean that if at the ten-charge there was full relief to IHT and 0% was charged on the trust, any exit arising in the following 10 years would be taxed at 0% (regardless of whether the asset qualified or not)

The change being proposed is that all exits from a trust will be subject to a recalculation of the rate to be used at the time of the exit, ignoring BPR/APR. This removes some current planning opportunities when trusts are wound up perhaps after the sale of a company.

If the trustees use part of the £1m allowance on an exit, the amount available on the 10-year charge will be reduced accordingly.

IHT on some assets qualify for the instalment option and interest free for all assets qualifying for 100% and 50% BPR/APR. It will be interesting to see how the already stretched trust team at HMRC will deal with complex calculations.

For new trusts being set up post Budget Day, the Government intends to introduce rules to ensure that the allowance is divided between trusts where a settlor sets up multiple trusts on or after 30 October 2024.

UPDATE: HMRC propose that this £1m allowance will be utilised in chronological order. If a settlor sets up a trust with BPR/APR assets with a value of £750k post 30^th October 2024, that trust will have £750k of a BPR/APR allowance for future ten-year charges and exit charges.

If a second trust is set up with a further £750k of BPR/APR property, that trust will have the remaining £250k of the BPR/APR allowance.

The settlors £1m allowance will refresh each 7 years in the same way the nil rate band of £325k refreshes.

For life interest trusts where the assets fall within the life tenant’s estate (and not within the relevant property regime) there will also be a restriction of BPR/APR. In the same way that there is £1m allowance for trustees, the same applies to an individual. Any IHT due arising on the death of the life tenant is borne by the trustees from the assets held so consideration will need to be given as to how this tax liability is funded.

UPDATE: The £1m allowance on death will be pro-rated between the deceased’s own free estate and the assets within a life interest trust. The £1m allowance is not transferable to a surviving spouse unlike the nil rate bands.

UPDATE: It has been proposed that related the property rules are extended to include trusts set up by the same settlor when looking at values to be used in an IHT calculation.

Currently these rules are designed to prevent minority discounts being applied to the value of an individual’s holding in an asset where for example the individual’s spouse also holds the same asset.

Currently, if you had 10 trusts all holding a 10% share in a company, for IHT purposes the value of each trust will be 10% of the full company value less a minority discount of perhaps 70% giving a much lower value for any ten-year charge or exit charge.

The proposal is that trusts set up by the same settlor will be “related” meaning that any minority discount in the example above will not be available and instead any discount will be based on the holding of all trusts set up by the same settlor.

For trusts which are created from Estates of parents for 18–25-year-old beneficiaries, these trusts will have a £1m allowance for each beneficiary. This is so that younger beneficiaries are not disadvantaged by older siblings who take their inheritance first.

Existing trusts will need to be reviewed so that the trustees can plan accordingly. However, the new rules are not yet known so trustees should not be too hasty in making decisions at this stage.