The Autumn Budget 2026 announced a targeted change to the inheritance tax (IHT) treatment of liabilities connected with trust property. Although technical, the change could be important where a trust has outstanding debts or other liabilities that are taken into account when calculating its value for IHT purposes, particularly where the trust property is treated as forming part of an individual's estate.
The new rules announced in the Autumn Budget will apply to transfers of value made, and events on which IHT is chargeable, on or after 28 October 2026, with legislation being introduced through the Finance Bill 2026-27.
Why has the change been announced?
An important backdrop to the Autumn Budget 2026 changes is the recent Court of Appeal decision in Elborne v HMRC, which concerned a historic form of IHT planning known as a home-loan scheme.
In broad terms, Mrs Elborne transferred her home to trustees in return for a £1.8 million promissory note, which she subsequently gave to a separate trust for her children. The arrangement sought to leave the property within her taxable estate while allowing the trustees’ corresponding liability to reduce its value for IHT purposes. HMRC challenged the arrangement but ultimately lost in the Court of Appeal.
The Autumn Budget papers do not specifically refer to Elborne, so it would be going too far to describe the new legislation as simply overturning that decision. Instead, HMRC says it has identified circumstances involving settled property where liabilities can reduce IHT in a way that is inconsistent with the intended operation of the legislation. Against the background of cases such as Elborne, it is easy to see why the treatment of trust liabilities has therefore come into focus.
What is changing following the Autumn Budget 2026?
At present, the IHT legislation does not specifically provide for trustees’ liabilities to reduce the value of trust assets. Instead, those liabilities can be reflected in the valuation through the trustees’ right to recover properly incurred liabilities from the trust fund, commonly referred to as the trustee’s right of indemnity or lien.
The new legislation announced in the Autumn Budget 2026 will put the treatment of trust liabilities on a direct statutory footing through a new section 162ZA of the IHT Act 1984. Subject to the wider IHT rules, a liability properly incurred by trustees on behalf of a settlement will be taken into account when valuing the settled property, to the extent that it remains unpaid. The trustees' right of indemnity or lien will no longer itself be taken into account for this purpose (draft legislation: section 162ZA Inheritance Tax Act 1984).
However, the changes do more than simply clarify how trust liabilities are valued. They also apply equivalent restrictions on the deduction of liabilities to certain trustee liabilities, including where a person is treated as beneficially entitled to settled property for IHT purposes.
Broadly, these rules are designed to restrict the extent to which a liability can reduce the value of trust property where the consideration for that liability derives, directly or indirectly, from the individual whose estate includes the trust property (draft legislation: sections 103A and 103B Finance Act 1986).
Does this mean trust borrowing will no longer reduce IHT?
No. The Autumn Budget change is not a blanket restriction on trust borrowing.
The legislation expressly allows properly incurred trustee liabilities to be taken into account. However, whether a particular liability ultimately reduces the value subject to IHT will depend on the wider rules governing liabilities, including the relevant anti-avoidance provisions.
The important question will therefore be whether a liability can properly reduce the value of the settled property under the new rules.
What should trustees and families do?
Existing trust arrangements involving loans, promissory notes or other liabilities may be worth reviewing, particularly where the IHT treatment of the arrangement depends on those liabilities reducing the value of settled property.
Trustees and families should understand what liabilities are in place, why they were incurred and how they are currently treated for IHT purposes. This will help identify whether the Autumn Budget 2026 changes could affect the IHT treatment of an existing arrangement and whether further advice is needed.
For support with trust planning and inheritance tax, contact our private client team.
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