Further to consultations launched earlier in the year in respect of the proposed changes to Agricultural Property Relief (“APR”), Business Property Relief (“BPR”), and Pensions as announced in the 2024 Autumn Budget on 30 October 2024, draft legislation on these reforms has now been published.

Despite all the protests, meetings, and consultation responses, it appears the Government is sticking to its guns with this draft legislation reaffirming those announcements made last October, albeit with some minor tweaks following the consultations. As such, unless something truly extraordinary happens, potentially the widest reaching shake-ups to IHT reliefs since IHT replaced Capital Transfer Tax in 1986 are set to go ahead.

Although I am sure many of you will be familiar with the changes announced from our previous Wheelers Words and other media, please see below a brief reminder of the policies announced:

APR and BPR

• From April 2026, a £1 million limit on property qualifying for 100% APR/BPR will come into force for individuals in respect of chargeable transfers arising within any seven-year period, such as on settlement into trust or on death.
• This £1 million limit is specific to each individual and is not transferable to spouses in the same manner as Nil Rate Bands and Residence Nil Rate Bands are.
• All relevant property trusts created be the same settlor from 30 October 2024 will share a single £1 million 100% APR/BPR limit.

Pensions

• From April 2027, the vast majority of pension schemes will cease to be exempt from IHT.
• The existing rules in respect of Income Tax on pension beneficiaries withdrawing funds post death continue to apply (i.e. where an individual dies before aged 75, no Income Tax liability arises for the beneficiaries, however, where an individual dies after turning 75, withdrawals are subject to Income Tax at the beneficiaries’ marginal rate).

Clarifications and Changes following Consultations

While much of what has been included within draft legislation is as envisaged from the Autumn 2024 Budget and consultation documents, there are a few points worth highlighting.

• Although this was somewhat anticipated, the draft legislation does confirm that neither APR nor BPR will be available in relation to any assets held within pension schemes. Therefore, where individuals hold business premises and/or agricultural assets within pension schemes, consideration needs to be given as to whether this is still the correct option.
• As a further point in respect of IHT on pensions, following the consultation responses, it has been announced that a deceased’s personal representative will initially be responsible for settling all IHT liabilities arising as part of administering the free estate, including those attributable to pension savings. This is in contrast to the changes originally proposed which put the onus and responsibility for payment of IHT in respect of unused pension savings on the pension scheme administrators. This means that unless beneficiaries of registered pension schemes instruct the pension scheme administrator to pay the IHT in respect of the unused pension savings direct, the total IHT liability will initially need settling by the personal representatives as part of administering the free estate. This could therefore create, or further exacerbate, liquidity issues.
• Although it was proposed during the consultations that all trusts settled by the same settlor are to be considered related property for valuation purposes, this has not made its way into the draft legislation.
• From April 2026, the calculation of IHT on exit charges arising in respect of distributions of capital out of a trust following the first ten-year anniversary will change.

Currently, any exits out of trust after the first ten-year anniversary incur an IHT exit charge by reference to the effective IHT rate at the last ten-year anniversary, adjusted proportionate to the number of complete quarters elapsed during the current ten-year anniversary.

However, from April 2026, exit charges are going to be calculated by reference to the value of the property held in trust on the last ten-year anniversary in the same manner as exits arising before the first ten-year anniversary.

Putting this into an example for context, let us say that at the last ten-year anniversary, a trust owned shares in an unlisted trading company valued at £650,000 which qualified for 100% BPR meaning that no ten-year IHT liability arose, i.e. an effective rate of 0%. Five years after said ten-year anniversary, the shares are sold leaving the trust holding £750,000 in the way of post Capital Gains Tax proceeds which are then distributed in full to the beneficiaries.

If the distribution took place under current pre-April 2026 rules, the IHT charge arising on the distribution would be calculated as £750,000 x 0% (the effective rate at the last ten-year anniversary) x 20 (number of complete quarters since last ten-year anniversary) / 40 (number of quarters within a ten-year period). In other words, no IHT charge would arise on the distribution.

In contrast, under post-April 2026 rules, the IHT exit charge arising on the distribution will now be calculated as follows:

• £650,000 (Value at last ten-year anniversary) – £325,000 (Nil Rate Band) = £325,000,
• £325,000 x 6% = £19,500,
• £19,500 / £650,000 (Value at last ten-year anniversary) = 3%
• £750,000 (Value distributed) x 3% x 20 / 40 quarters = £11,250

As can be seen, this is a significant change to the current position. However, with advanced planning, in some circumstances the effect of this change can be managed/mitigated.

For example:
If in the above scenario, the trust had a £1 million limit on assets qualifying for 100% APR/BPR and had appointed the shares out before the sale arose, the appointment out would still have benefitted from 100% APR/BPR (assuming the value leaving the trust was less than £1 million) and as such, no IHT exit charge would arise.

As such, it will be more important than ever to ensure that the timing of distributions from a trust are considered carefully where there is the potential that APR/BPR will cease to be available on property held in trust.

Points to take away

Although everyone’s individual situation will need assessing on its own merit, in light of these changes, there are a few actions which anyone concerned about their IHT exposure should do:

• Review your IHT exposure, particularly in light of unused pension savings being brought within the scope of IHT.
• Reassess any historic IHT planning undertaken as it may not now achieve what it would have before these changes.
• Reconsider the order in which funds are utilised in latter years and consider whether it would be better to draw from pensions in preference to extracting value from businesses.
• Where individuals hold agricultural and/or business property within pension schemes, consider whether this is still the correct option.

Get in touch

Inheritance Tax remains a complex and sensitive area, and the government’s announcements are an important reminder to keep estate plans under review. If you would like tailored advice on how these changes may affect you or your family, our team is here to help. If you’re already a client do get in touch with your usual Wheeler’s contact who will be pleased to provide further support.