How can farmers use trusts to mitigate the impact of IHT changes?

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Changes to  Agricultural Property Relief (APR) and Business Property Relief (BPR), have prompted many farming businesses to reassess their succession plans, leaving them in a position where they need to remove assets from their estate and decide which family members should own them.

In light of these changes, which will reduce the scope of the reliefs from April 2026, trusts have emerged as a viable strategy to manage and protect assets while potentially reducing Inheritance Tax (IHT) liabilities.

For those looking to utilise trusts, it is important to firstly consider the opportunities they present, how the Government will apply the proposed changes to assets transferred into trusts, and any potential pitfalls.  

The rules around trusts in relation to the changes were initially set out in the 2024 Autumn Budget, and at long last we have now got some draft legislation, but it will be some time before this passes through Parliament and becomes legislation.

The rules around trusts are complicated but there are typically three occasions IHT charges arise:

1. Transfers into trust

When an individual makes a lifetime transfer into a trust, they are known as the settlor and are subject to an immediate IHT entry charge at 20% of the gross value of the transfer – after deducting any reliefs, exemptions and available nil-rate bands.

The new £1m limit of APR and BPR will not apply to any transfers of qualifying agricultural and business property into a trust before 6 April 2026, provided that the settlor survives for seven years from the date of transfer.

If the settlor doesn’t survive seven years:

• For transfers made before 30 October 2024, no IHT should be payable on death as unrestricted APR and BPR applies.
• Transfers made after 30 October 2024 are subject to the new £1 million allowance so the trustees may need to pay additional IHT on death).

For trusts set up on or after 6 April 2026, all transfers of qualifying agricultural and business property will be subject to the £1 million allowance and so could result in both an IHT entry charge and charge on death within seven years.

2. 10-year anniversary charges

On every 10-year anniversary of the creation of the trust, there is a charge of up to 6% of the value of the property in the trust (after any reliefs, exemptions and nil-rate bands have been deducted).

These changes are being phased in so the full rate of 6% will not apply until April 2036. This is a complex area and advice is needed to understand how this might apply to your circumstances.

3. Transfers out of trust

If assets are distributed from a trust, the trustees pay a reduced rate depending on the time elapsed since either the creation of the trust or since the last 10-year anniversary charge.

Key considerations for trusts

While the benefits of using a trust will be more restricted from April 2026, trusts are still an extremely useful tool for IHT planning. For example, a farmer can place assets in trust, but continue to control them by making themselves or a trusted adviser/friend a trustee to run the trust.

Trusts are also useful where family members are too young to be involved in succession plans. By using a discretionary trust, no family member is guaranteed to receive assets from the trust, and succession planning can be deferred.

It is also important to remember that there are compliance costs to consider in creating and administering a trust.

Trusts present opportunities to mitigate IHT, but it is also important to keep them under constant review and amend as appropriate as circumstances change.