Following the reforms announced in the October 2024 budget relating to Business Property Relief (BPR) and Agricultural Property Relief (APR), HMRC on 27 February 2025 launched a technical consultation to seek views on the application of the reforms.
This article will cover points raised in that consultation, along with other guidance already raised from the initial summary of the reforms.
Please note that the reforms to BPR and APR are not yet set in stone and are subject to change.
Overview
The October 2024 Budget announced two reforms that will apply to BPR and APR that will take effect from 6 April 2026:
- The 100% rate of relief will be limited to the first £1 million of combined agricultural and business assets. For assets above £1 million, the rate of relief will be 50%.
- For shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM, the rate of BPR will be reduced to 50% in all circumstances.
Following the budget, HMRC produced a policy paper covering a summary of the reforms. This confirmed the following points relating to the new £1 million allowance.
- Assets automatically receiving 50% relief will not use up the allowance.
- Any unused allowance will not be transferable between spouses and civil partners.
- The allowance will cover transfers on death and also failed PETs and chargeable lifetime transfers. The government has put rules in place so that for any lifetime transfers made on or after 30 October, so after the budget, if the donor of the gift dies after the new BPR rules come into effect on 6th April 2026, they will be caught under the new rules.
- The allowance applies to the combined value of agricultural and business property, i.e. it is not a million allowance for BPR and a separate million for APR.
Technical Consultation February 2025
The technical consultation includes a variety of proposals. It confirms that if gifts of agricultural or business property are made in lifetime, the £1 million allowance will refresh every 7 years similar to the nil rate band and that executors will have the option to make the IHT payments relating to agricultural or business property over 10 years in interest free payments.
The bulk of the technical consultation however, relates to the application of the £1 million allowance to trusts.
Relevant Property Trusts
Relevant property trusts will have a £1 million allowance for the purpose of calculating anniversary and exit charges. Trusts with a combined value of more than £1 million of qualifying agricultural and business property will receive 100% relief against ongoing trust charges up to a value of £1 million, and 50% relief for the value above.
The £1 million allowance for relevant property trusts will refresh every 10 years, so that qualifying agricultural and business property held in that trust benefits from 100% relief up to a value of £1 million on each 10-year anniversary charge
The £1 million allowance will also apply to qualifying agricultural and business property which is subject to an exit charge. If there are multiple exits during a 10-year period, the relief is applied cumulatively. For example, if the first exit uses £300,000 of the £1 million allowance, then 100% relief can then be used against the next exit charge up to a value of £700,000, and so on until the next 10-year anniversary.
Any £1 million allowance which is used against an exit charge will reduce the maximum allowance that is available at the next 10-year anniversary.
The £1 million allowance will not apply against exits in the first quarter following the creation of the trust and a 10-year anniversary charge, as under the current rules there is no exit charge on these exits.
Trusts created before 30 October 2024 will be brought into the new regime at the trust’s next 10 year anniversary on or after 6 April 2026. Any exits after 6 April 2026 but before that trust’s next 10 year anniversary will continue to receive unlimited 100% relief. As an example, if a trust was created on 1 April 2020, it will be brought into the new regime on its first 10 year anniversary on 1 April 2030, and all exits for that trust between 6 April 2026 and 1 April 2030 will continue to get the unlimited relief. On that trust’s first 10 year anniversary in the new regime, the £1 million allowance for trustees will only apply to complete quarters which fall on or after 6 April 2026. The consultation has a good example of how this will work in practice.
Lifetime Trusts
Where a settlor has transferred qualifying agricultural or business property into multiple trusts on or after 30 October 2024, there will be a single £1 million allowance for 100% relief against ongoing relevant property trust charges. This will be allocated in chronological order, with priority given to the first trust, then each successive settlement in order until £1 million of qualifying property has been settled and the entire £1 million allowance for 100% relief has been allocated to the trustees.
If qualifying agricultural or business property is transferred into two or more trusts on the same day, the £1 million allowance will be apportioned across the value of the qualifying relievable property in the same way as the nil rate band.
Bereaved Young Persons Trusts
The allowance will have some particular rules relating to bereaved young persons trusts or 18-25 trusts as they are sometimes known. Under these trusts, there is an IHT exit charge that applies when the beneficiaries take their share of the trust assets of these trusts. The rate of the exit charge won’t exceed 4.2%.
The nature of these trusts means that the application of the £1 million allowance on the exit charge could produce adverse outcomes for younger siblings if for example, the eldest child uses up most or all of the allowance when they come of age and take their share of the fund leaving little or no allowance for the younger children. To prevent this, each bereaved young persons trust will benefit from their own £1 million allowance for 100% relief to be used against the exit charge when their share of the funds are distributed.
Qualifying Interest in Possession Trusts
There are also some considerations for qualifying interest in possession trusts to consider. If a qualifying interest in possession trust owns qualifying business or agricultural property and the life tenant also owns qualifying business or agricultural property, the allowance will be apportioned between the trust and estate proportionately.
Conclusion
The technical consultation, which runs until 23 April 2025, is essential reading for those impacted by these reforms. We will be closely monitoring the release of the response document. Additionally, HMRC plans to conduct a further technical consultation on the draft legislation later this year.
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