Consultation on agricultural and business property relief

On Thursday 27 February 2025, HMRC released their consultation on the proposed £1million allowance for 100% business property relief (BPR) and agricultural property relief (APR) from inheritance tax (IHT). 

As a reminder, the £1million allowance will limit the availability of 100% BPR and APR. For value in excess of this allowance, relief will be capped at 50%. For assets for which only 50% relief would apply, the value of those assets will not use up this new £1million allowance. 

The consultation is not so much a consultation on the policy itself, but instead a consultation on the technical application of the government’s apparently decided approach. The consultation document provides a clear indication of how the final legislation will work.

In the paper, reference is made to “qualifying agricultural and business property” to mean that property which would obtain 100% relief under the APR and BPR rules. Similarly, while advisors to date have referred to this as the imposition of a “cap” of relief, the document phrases this as an “allowance”. In both cases, we have adopted the consultation’s wording below.

£1million allowance and individuals 

Individuals will have a £1million allowance for qualifying agricultural and business property. It will operate in a similar way to the existing nil rate band. The allowance will refresh every 7 years, will be used up by chargeable lifetime transfers, and any remaining allowance will be apportioned between the various qualifying agricultural and business subject to IHT on death (e.g. trust interests, outright interests, property in which there is a reserved benefit).

Unlike the nil-rate band, the consultation confirms that any unused allowance will not be transferable between civil partners and spouses. The allowance is a “use it or lose it”. 

£1million allowance and trusts 

Relevant property trusts will have a separate £1million allowance that will determine the available relief for exit and anniversary charges. That allowance will refresh every 10 years. The trust’s allowance will not impact entry charges – any entry charges will be referable to the settlor’s available allowance. 

For qualifying agricultural and business property settled into trust before 30 October 2024, that trust will have its own £1million allowance. 

For qualifying agricultural and business property settled on or after 30 October 2024, the £1million allowance will be shared between all of that settlor’s post-Budget trusts. So if their first trust post-Budget uses £750,000 of the allowance, then subsequent trusts would only have £250,000. The allowance is used up on a chronological basis except for same day settlements which will share the £1million allowance proportionally in a similar way to the nil-rate band. 

The allowance attributed to a trust will last for that trust’s lifetime. If a trust no longer uses the allowance (or also, presumably, if the trust comes to an end), then the allowance cannot be transferred between other trusts of that settlor. 

If there are exits from a trust of qualifying agricultural and business property in excess of or equal to that trust’s allowance, when the next anniversary charge comes round, as the whole allowance will have been used in the preceding 10 years, there will be no allowance available for that 10-year anniversary and any relief of qualifying agricultural and business property will be limited to 50%. 

Finally, there is another proposed change in relation to how exit charges are calculated. At the moment, the way in which exit charges are calculated before the first 10-year anniversary and after the first 10-year anniversary is different. Currently, for an exit before the first 10-year anniversary, APR and BPR is not taken into account when calculating the rate of IHT. For exits between 10-year anniversaries, APR and BPR are taken into account. The consultation suggests standardising the position so that the tax rate on exits will never be calculated with reference to APR and BPR and instead will always be calculated on the unrelieved value of the assets. Onto that amount, the trust’s share of the £1million allowance would then apply. While administratively this makes some sense, it will result in more IHT being paid by some trusts for exits between 10-year anniversaries. 

Transitional rules for individuals 

Broadly, as the initial notes released on the day of the Budget suggested, transfers made before 30 October 2024 (regardless of when the donor dies or if this was a potentially exempt transfer or chargeable lifetime transfer) will not fall within the new rules. 

For failed potentially exempt transfers made on or after 30 October 2024 with a death before 6 April 2026, the new rules will not apply. 

For failed potentially exempt transfers made on or after 30 October 2024 with death within 7 years on or after 6 April 2026, the new rules will apply. 

For any entry charges after the Budget and before 6 April 2026, the new rules will not apply provided the settlor survives 7 years. If the settlor does not survive 7 years and dies on or after 6 April 2026, this will be taxed as a failed potentially exempt transfer with a charge of 40% on the value subject to any reliefs, including the £1million allowance of the settlor. 

Transitional rules for trusts 

For property settled before 30 October 2024, the new allowance will only be relevant from the next 10 year anniversary falling on or after 6 April 2026. Any exits from a trust post-Budget but before the trust’s next 10 year anniversary falling after 6 April 2026 will not be under the new rules and will not reduce the allowance available for the trust’s first 10 year anniversary on or after 6 April 2026. 

Any property settled on or after 30 October 2024 but exiting before 6 April 2026, will not be subject to the new rules and 100% relief will be available. Such an exit will also not reduce the allowance available at the next 10-year anniversary charge if the trust continues. 

However, for property settled on or after 30 October 2024 and exiting on or after 6 April 2026, the new rules will apply, relief could be capped, and any exit will reduce the allowance available at the next 10-year anniversary. 

For the first 10-year anniversary on or after 6 April 2026, the allowance will only apply to complete quarters falling on or after 6 April 2026 – i.e. the old rules will apply to the quarters before 6 April 2026. 

Related property 

The IHT legislation already includes rules around related property. The rules are designed to prevent the artificial fragmentation of the ownership of assets to reduce the overall value. 

It is proposed these rules are extended to include qualifying agricultural property and business property settled by the same person. So if a settlor wished to use their personal £1million allowance every 7 years to settle a share of qualifying agricultural property and/or business property, even if that property was held across numerous trusts, no minority discounts on the valuation would be possible and the asset would have to be valued as if the ownership was not split. 

Particular trusts 

For 18-25 trusts – which are taxed differently to other relevant property trusts – each beneficiary will have a £1million allowance rather than the trust only having one allowance. This is to prevent unfairness between beneficiaries becoming absolutely entitled at different times (usually when they reach 25) and using up the allowance of beneficiaries who will take their share at a later time. This is a sensible adjustment and will mean that these kinds of trusts continue to be a good option for those not needing a longer lasting trust in their Will. 

For qualifying life interest trusts where the assets are treated as part of the life tenant’s estate for IHT purposes (immediate post-death interests, pre-2006 life interests, and disabled person’s trusts), that position will continue under the new rules and any £1million allowance will be referable to that beneficiary and not any allowance of the trustees.

Instalments 

One of the government’s claims in mitigation for the impact these changes will have is that, for some property, IHT can be paid via instalments across 10 years. In some circumstances this is interest free. 

The consultation explains that it is proposed that the availability of interest free instalments will be extended to all property eligible for APR and BPR, regardless of whether that is relieved at 100% or 50%. 

Next steps 

While the consultation provides some much needed guidance as to how the £1million allowance is likely to apply, it makes no concessions as to the policy itself. Business owners and farmers will find that disappointing. 

There is a lot of detail here for clients and their advisors to consider. Over the next few weeks we will focus on particular aspects of these rules and some practical considerations to be thinking about. 

While the consultation provides some much needed guidance as to how the £1million allowance is likely to apply, it makes no concessions as to the policy itself. Business owners and farmers will find that disappointing.