The New Inheritance Tax Relief Trap for Trusts

This article refers to Business Property Relief (BPR). It applies equally to assets qualifying for Agricultural Property Relief (or any mix of the two), but to avoid repetition it will only refer to BPR.

In April 2026, Labour’s new rules for limiting BPR on Inheritance Tax (IHT) will come into force. Understandably, the focus has been on the impact this will have on family business owners and farmers on death – the results are (mostly) quite clear and direct. However, the new rules for how these restrictions apply to Trusts are complex and counter-intuitive, and I predict will catch out many families and advisors. This is particularly relevant as many people may wish to implement new Trust planning before the limits take effect on 6 April.

Until now, certain interests in a trading business or farm were completely free from IHT. This applied to IHT on the death of the owner, on a transfer into a Trust, and on assets held in a Trust. Simple – if the asset qualified (including being held for at least two years already) then there was no IHT.

Personal Rules

The media’s focus on the new rules has been on the IHT on death (which also applies to transfers into a Trust) – the limit on full relief was originally going to be £1m per person, refreshing every seven years, with no transfer of the allowance to a spouse or civil partner. It has since changed so that it is £2.5m per person, it does transfer to a spouse or civil partner on death, and any tax can be paid over 10 years with no interest. Other than removing the full relief from some assets (AIM shares), that is broadly what is needed to understand how it will apply when a person dies or gifts a BPR asset.

How the reliefs will apply in relation to assets held in Trusts is another issue.

Trusts

Most Trusts pay 6% IHT every 10 years on the value of the assets over £325,000. Where full BPR applies, the taxable value of the assets is reduced to nil, so the IHT on them is nil.

With the new limits on full BPR, any Trusts which hold qualifying assets need to consider how they access the allowance, and anyone planning to set up a Trust using BPR assets needs to think about how that will work over time.

Before we get to the allowances, it is worth commenting on the tax applicable to Trusts when the value exceeds the allowances. Qualifying BPR assets within the allowance will have full relief from IHT, and assuming the Trust has a full nil-rate-band (£325,000) then additional qualifying BPR assets of £650,000 would also have full relief (BPR still reduces the value of these excess asset by 50%, so the nil-rate-band covers twice as much). Any qualifying BPR assets above that level will still have their value halved, but they will then be taxed at 6% (which is equivalent to a 3% tax in their full value). Non-relievable assets would still be taxed at 6%, payable within six months. The tax on the BPR assets can be paid over 10 years (first payment within six months), with no interest payable.

If the Trust has no cash and needs a dividend from the family business to pay the IHT, then the addition of the Income Tax on the dividend means the effective tax rate is almost 5% of the value of the shares. Dealing with that has its own challenges (which I am not going into here), so clearly it is important to understand the allowances and how they apply to Trusts.

Allowances

On the surface, the new rules for the Trust allowances appear intuitive: each person can use their allowance of £2.5m, and their Trust (or Trusts) will have a total allowance to match. But the way in which it has been implemented will cause all manner of problems.

I find it helpful to think of there being three separate BPR allowances: the ‘Personal Allowance’ and the ‘Lifetime Trust Allowance’, both of which start at £2.5m per person, and finally the ‘Actual Trust Allowance’, which is the allowance a particular Trust has access to.

We then need to look at two different types of Trust: those ‘old’ Trusts which were already in existence on 29 October 2024, and the ‘new’ Trusts which were set up after that date.

‘Old’ Trusts (pre 30 October 2024)

For an ‘old’ Trust, the rule is quite straightforward. The Trust will have an Actual Trust Allowance equal to the lower of (a) the market value of the qualifying BPR assets it held at midnight on 29 October 2024, and (b) the maximum of £2.5m. For this test you must follow the new rules for BPR, so a Trust which only held AIM shares (which had full relief at the time, but not under the new rules) will not have any Actual Trust Allowance. The cap of £2.5m will increase with the Consumer Price Index (CPI) each year from 2030, but this will only help Trusts which had BPR assets over the cap on 29 October 2024 (it is the cap which increases). This indexation does not help cover inflation in value of the assets.

That was the easy one.

‘New’ Trusts (from 30 October 2024)

For a ‘new’ Trust, we need to check whether the Trust acquires an Actual Trust Allowance from the Settlor, which will depend on the Settlor’s available ‘Lifetime Trust Allowance’ when the Trust is established. All new Trusts should be keeping a record of this when the Trust is established (go back and make a record of this for any Trusts established since 30 October 2024).

Each person has their Personal Allowance, which as mentioned above resets every seven years and is transferrable to a spouse or civil partner on death. The Lifetime Trust Allowance is separate (but related). It is non-transferable, non-refundable, and it does not refresh. Once it is used, it never comes back. From 2031, the Lifetime Trust Allowance will increase with the CPI, and so people will slowly get access to a little more over time (even if they have used the whole of the allowance they had before the increase).

When a person uses any of their Personal Allowance to transfer BPR assets into a Trust, they automatically transfer an equal value of any available Lifetime Trust Allowance. So if they claim £1m of BPR relief on assets passing into a Trust, they also use up £1m of their non-refundable Lifetime Trust Allowance so that the Trust gains £1m of Actual Trust Allowance. Note that if the person had less than £1m of their Lifetime Trust Allowance available, then the Trust’s Actual Trust Allowance would be reduced to what was available, even if the person had enough Personal Allowance to get full relief on the transfer into the Trust.

There are two main consequences of this mechanism:

Firstly, a Trust’s Actual Trust Allowance is fixed based on the value of the assets when they are added to the Trust (capped by the available Lifetime Trust Allowance of the Settlor at the time). This means that if the Trust is wound up or ceases to hold qualifying assets, there is no refund of the Lifetime Trust Allowance to the Settlor, and no other Trusts by the same Settlor can make use of that allowance. Indexation appears not to help at all once a Trust is established, since the Actual Trust Allowance is calculated at the time of the transfer to the Trust.

Secondly, a person who uses their Lifetime Trust Allowance will not be able to grant any Actual Trust Allowance to a Will Trust on death. As above, this is true whether the previous Trusts still hold BPR assets or not, or even whether those previous Trusts still exist at all.

This means that anyone who already has or at any time sets up a Trust with an Actual Trust Allowance should be considering how that allowance is used. If not used, it will be wasted.

All of this will complicate 10 year anniversary charges and exit charges, and the industry will therefore probably need to increase fees for this.

Helpfully, the above rules include assets which benefit from BPR on the death of a life tenant of a ‘qualifying interest in possession’ Trust. It is not immediately obvious, but this is treated as if the life tenant were settling a new Trust (except for when the 10 year charge applies), and so what we might think of as a single Trust can effectively be two Trusts for assessing the available allowances.

The interactions between the Personal Allowance for BPR and how the Actual Trust Allowance works is going to take time for everyone to get used to. Careful thought will be needed on how the use of the allowances interact with other planning which also uses the relief, for example post-death planning using business assets.

Qualifying BPR assets (and APR assets!) will remain valuable for estate planning, but anyone with BPR assets valued over the new thresholds will need to be more proactive to make the best use of the allowances. Trustees will need to be very careful to keep proper records and take good advice on how these rules apply to their Trust – it is not always obvious, and it will be easy to waste or lose the available reliefs.

At TLT, we can help families and trustees trying to understand how the new rules will impact their planning. We are working with many family business owners and farmers to navigate the new rules and help with the effective transfer of the family wealth to future generations.

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2026. Specific advice should be sought for specific cases. For more information see our terms & conditions.