The forthcoming changes to inheritance tax rules for individuals holding business or agricultural assets have been well-publicised. What is less well-known is that changes will also affect property within trusts, which are subject to 10-year inheritance tax anniversaries (known as relevant property trusts).
At present, most business and agricultural assets qualify for relief at 100%, meaning that a trust containing only these assets generally paid no inheritance tax on its 10-year anniversaries. However, under the new rules, this property will attract relief at 100% only up to £1 million, and at 50% above that value.
For existing relevant property trusts with property settled prior to 30 October 2024, the new rules will need to be considered from the first 10-year anniversary, which falls after 5 April 2026. This will only apply to complete quarters following this deadline.
By way of example, if such a trust currently holds agricultural land worth £2 million, and its next 10-year anniversary is 31 March 2026, the existing rules apply. This means that there will be no inheritance tax due on this occasion because of qualification for 100% agricultural relief.
However, if the situation is the same, except the next 10-year anniversary falls on 31st July 2026, the new regime applies and the inheritance tax due is as follows:
The relevant transfer to tax is £500,000, following 100% agricultural relief on the first £1 million and 50% on the remaining balance of £1 million.
A tax rate is applied between 0% and 6% based on a complex formula depending on (amongst other things) the value of the trust. The rate in this case is 2.1%.Because there are 40 quarters in a decade, the rate of 2.1% can be expressed as 0.0525% per quarter.
So, the tax in this case relating to a 10-year anniversary falling on 31st July 2026 (which is one complete quarter after 5th April 2026) is £500,000 x 0.0525% = £262.50.
As we move further into the new regime, inheritance tax liabilities will increase as more quarters elapse. However, from 6 April 2026, inheritance tax on all property eligible for Agricultural Relief or Business Relief will be able to be paid in 10 equal annual interest-free instalments.
There may be opportunities for trustees holding agricultural or business assets to undertake tax efficient planning before the new regime begins, so please speak to your usual Mills & Reeve contact if you have any queries.
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