Autumn Budget 2024: Changes to APR and BPR

What's changing?

The Government announced that it will reform agricultural property relief (APR) and business property relief (BPR) from 6 April 2026. At present, relief applies to agricultural property and certain businesses/interests in businesses at a rate of either 50% or 100%.

Many of you will have undertaken restructuring in recent years to maximise the availability of relief at the rate of 100%.

With effect from 6 April 2026:

• Relief at the rate of 100% will only be available for the first £1m of combined agricultural and business property. This £1m allowance will not apply to AIM shares, for which the maximum rate of relief will be 50% from 6 April 2026.
• If the total value of an individual’s relievable property exceeds £1m, the allowance will be applied proportionately across the qualifying property. For example, if you own £3m of agricultural property and £2m of business property, the allowance will be split as to £600,000 for the agricultural property and as to £400,000 for the business property.
• Once the £1m allowance is exceeded, the maximum rate of relief will be 50%. The detailed policy paper states “assets automatically receiving 50% relief will not use up the allowance”.  We understand this to mean that only assets currently qualifying for relief at the rate of 100% will use up the £1m allowance.
• Any unused part of the £1m allowance will not be transferable between spouses.

The £1m allowance will apply after April 2026 to:

• Property in a person’s estate on death (it is unclear whether this will include trust assets deemed to be in an individual’s estate for IHT purposes)
• Gifts made to individuals on or after 30 October 2024 and in the 7 years before death if the death occurs on or after 6 April 2026
• “Lifetime chargeable transfers” eg gifts into trust – the policy paper does not state whether this applies to transfers made from 30 October 2024 or 6 April 2026

“Relevant property” trusts (ie those which are subject to 10 yearly and exit charges) will also qualify for a £1m allowance on the value of qualifying property to which 100% relief applies on each 10 year anniversary and exit charge. A technical consultation will be undertaken in early 2025 on the detailed application of the new policy to charges on trust property.  

Where settlors have created more than one trust before 30 October 2024, each trust will benefit from a £1m allowance for 100% relief from 6 April 2026. It is to be clarified whether this includes all trusts or only relevant property trusts.

Where multiple trusts are created by the same settlor after 30 October 2024, the £1m allowance will be divided between them.  

The new rules will apply to lifetime transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026. For example, if John made a gift of unquoted shares in a qualifying trading company valued at £2m to his son Tom on 31 October 2024 and John dies on 7 April 2026 BPR will be applied as follows:

• 100% BPR will apply to the first £1m
• 50% BPR will apply to the next £1m

IHT will be applied at the rate of 40% to the £500,000 of unrelieved value (giving an effective IHT rate of 20%). It's unclear whether the rate of tax would be tapered (as it is now) in the event John survives the gift by at least 3 years but we assume that would be the case.

The implication is that where the gift has been made before 30 October 2024, the current rules will continue to apply on death within 7 years.

An individual’s estate will continue to benefit from the nil rate band (NRB), residence nil rate band (RNRB) and other exemptions (e.g. the spouse exemption). However, it must be remembered that the RNRB is tapered by £1 for every £2 once the value of an individual’s estate (before reliefs and exemptions) exceeds £2m so that no RNRB is available once the value of the estate exceeds £2.35m (subject to any carried forward allowance). Many farmers’ and business owners’ estates will be of a value where no RNRB is available. The NRB and RNRB thresholds of £325,000 and £175,000 have been frozen until 2030 (previously frozen by the Conservatives until 2028).

In a typical scenario, a married couple owning a farm/estate/trading business should be able to pass assets worth up to £2.65m to the next generation free of IHT on death (2x £1m allowances plus 2x NRBs).    

What planning options remain available?

Until draft legislation is published, there is a lack of clarity around some of the more technical detail. It remains possible that the new rules will be varied. There may, for example, be an increase in the £1m threshold but it seems unlikely the Government will want to be seen to do a U-turn. Pending draft legislation, we suggest giving consideration to the following:

Gift assets to the next generation and survive 7 years

This remains a viable option for those who have a good chance of surviving for 7 years. Even in the event of death within 7 years, the position would no worse than if assets are retained at death and it could be significantly better.  

The ability to rebase assets for CGT purposes to market value on death would be lost but given many farms, estates and family businesses are retained, this is not always a significant issue in practice. If assets are sold, IHT will have been avoided and tax (CGT) will just become payable on the historic gain. Although CGT rates have increased from 10% and 20% to 18% and 24% (so that they are now aligned with the CGT rates for residential property) this is likely to be preferable to an effective IHT death rate of 20% on the total value. Further, if the gain is triggered on sale, cash should be available to pay the CGT liability whereas IHT is a “dry” tax charge.

The other downside to giving assets away is that the donor cannot continue to benefit from them unless they provide full consideration.

Typically this means paying a full market rent for continued occupation/enjoyment. If the donor continues to derive a benefit without paying full consideration, there is a “reservation of benefit” so that the value of the gifted assets remains in their estate for IHT purposes and the reason for making the gift is negated. The potential IHT saving therefore needs to be weighed against income and capital requirements.  

Existing Trusts

Retain pre 30 October 2024 trusts owning property that currently qualifies for 100% APR/BPR to “bank” the £1m allowance.

Adding to pre 30 October 2024 trusts is unlikely to be possible, either due to anti-avoidance provisions or because the addition may be treated as a new (post 30 October 2024) settlement for IHT purposes.

We will need to await the outcome of the consultation and draft legislation before being able to advise on this.  

New trusts

There is a window of opportunity until 6 April 2026 to settle assets worth more than £1m that qualify for 100% relief onto a new trust (or trusts).  

Whilst the trust assets would be subject to 10 yearly and exit charges, the maximum effective rate of tax would be 3% every 10 years or on exit, compared to 20% if assets are owned by the settlor at the time of their death. 10 year charges can be planned for and the IHT paid over 10 years by equal instalments.  

As mentioned above, a new trust created post 30 October 2024 will have a £1m allowance but this will be shared with other trusts created by the same settlor after this date.  

The downsides are the same as for outright gifts – IHT becomes payable if the settlor dies within 7 years on or after 6 April 2026 and the settlor must avoid a reservation of benefit. The advantage of a trust is that it provides flexibility where, for example, the settlor has several children and is uncertain how to divide assets between them. Further, trusts provide an additional layer of asset protection in the event of a beneficiary’s divorce or bankruptcy. The settlor can retain a degree of control by appointing themselves as a trustee and retaining the power to appoint additional/new trustees during their lifetime.

Insurance

To date, many individuals have taken out life insurance to cover the IHT liability, or part of it, that will arise on their death in relation to non-relievable assets. Taking out life insurance whilst young and healthy (particularly on a joint life second death basis when married) remains a sensible option.  

If the full amount of the policy proceeds are not required to pay IHT, there is a cash fund available to provide any successors with some (often much needed) liquidity. There has been no suggestion that where policies are written in trust, the proceeds will be subject to IHT on the assured’s death (to be contrasted from the position with pensions, which are to be brought within the IHT net from 6 April 2027).

Maintaining the level of cover tends to become increasingly expensive as the life assured ages. It is, therefore, worth investigating guaranteed whole of life cover, where the premiums are guaranteed not to increase. This may seem expensive at the outset but can end up being more cost effective in the long run. 

Continue to maximise the availability of reliefs

It remains sensible to maximise the availability of APR and BPR as before. What does this mean in practice?

Fully utilising the £1m allowance per person. For a married couple, ensure full use is made of both spouses/civil partners’ allowances by transferring ownership of relievable assets to the extent necessary.
Structure sole trades, partnerships and companies to be predominantly trading to ensure they qualify for BPR, albeit the rate of relief (after the £1m allowance) will be limited to 50%. “Predominantly trading” continues to mean more than 50%.

In many cases, there will no longer be a need to complete surrenders and re-grants of Agricultural Holdings Act tenancies to secure APR at the rate of 100% as it is likely the £1m allowance will be fully utilised by other relievable assets. This will, however, need to be considered on a case by case basis.

Consider opportunities to devalue assets

Splitting the ownership of assets can result in a significant IHT saving because the sum of the parts is often less than the whole. For example, John gifts a 50% interest in a let property to his son Tom. 

The value of each 50% interest can be discounted by at least 10% to reflect the joint ownership. Much higher discounts can be applied to certain assets such as minority shareholdings. 

Conclusion

The announced changes will undoubtedly be causing much concern. However, there continue to be opportunities to mitigate the IHT burden.

It remains possible that the Government will decide to increase the £1m allowance and in the longer term, the next General Election (or the one after that!) could see a return to lower taxes under a Conservative government.

If you wish to discuss the recent announcements do get in touch with your usual Mills & Reeve contact.

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