Tag: IHT

Inheritance Tax Changes Effective 6 April 2026: Key Considerations for APR and BPR Planning

The 2024 Autumn Budget introduced significant reforms to Inheritance Tax (IHT), particularly relating to Agricultural Property Relief (APR) and Business Property Relief (BPR). These changes, scheduled to take effect on 6 April 2026, represent a shift from the previously uncapped regime and could materially impact succession and estate planning.

This note highlights the main legislative developments and summarises planning opportunities discussed during a recent consultation with counsel. The client in question owns 100% of a trading company and is in his mid-70s; his spouse is approximately six years younger.

Background: APR/BPR Regime Pre-Budget 2024

Before the 2024 Autumn Budget, individuals owning qualifying assets could transfer them without significant IHT concerns, thanks to full APR/BPR relief. The new framework introduces caps and conditions that necessitate proactive planning.

Key Budget 2024 Announcements

  1. Introduction of a £1 million Allowance
    • A £1 million allowance will apply per individual to the combined value of property qualifying for 100% APR or BPR.
    • After this threshold, qualifying assets will attract only 50% relief.
  1. Clarifications from the Spring 2025 Consultation
    • The £1 million allowance is not a lifetime limit. Like the nil-rate band, it refreshes every seven years.
    • Lifetime gifts of qualifying assets will not use the allowance if the donor survives the gift by seven years.
    • The allowance is not transferable between spouses or civil partners.
    • Trusts receiving qualifying property will also enjoy a £1 million APR/BPR relief in calculating IHT on ten-year anniversaries or exit events.
    • IHT due on APR/BPR assets may be paid in ten equal, interest-free annual instalments.

Note: Although the instalment option is welcome, the estate may need to pay income tax on any income received to fund the IHT payments, reducing the net amount available.

Planning Suggestions

  1. Share Transfers Between Spouses
    • A long-term UK-resident shareholder (‘A’) should consider gifting qualifying shares to their long-term UK-resident spouse/civil partner (‘B’).
    • After two years of ownership, ‘B’ may transfer up to £1 million of shares into trust. This process can be repeated every seven years.
    • ‘A’ can carry out the same strategy independently, allowing for effective use of both £1 million allowances.
  2. Will Revisions
    • Both spouses should revise their wills to provide for a transfer of up to £1 million of qualifying assets into a discretionary trust if they have not used their relief in the preceding seven years. This helps preserve unused APR/BPR allowances on death.
  3. Company Qualification Review
    • Several types of assets can qualify for BPR, including unquoted shares in a trading company.
    • Relief is not available if the company is wholly or mainly engaged in:
      • Dealing in securities, stocks, or shares
      • Dealing in land or buildings
      • Making or holding investments
    • It is advisable to review balance sheets and business activity to confirm BPR eligibility.
  4. Gifts with Reservation of Benefit
    • Lifetime gifts may trigger reservation of benefit rules, especially if the donor continues to receive income (e.g. director’s fees).
    • With proper structuring, this should not impede implementation of the planning strategies.

Next Steps

If any of the matters above raise questions or merit further discussion, please feel free to get in touch.

Contact
Robert Schon
📧 rschon@streathers.co.uk
📞 07749 051312

A fringe sport

US citizen spouses/civil partners married to a non-US citizen and the ‘read-across’ for a UK domiciliary married to/in a civil partnership with a non-UK domiciliary

I recently met a school friend for coffee. Today he is a retired academic and lives in Scotland. His wife is a tax compliant US citizen (meaning she has annually filed tax returns to the IRS.)  She has lived here 50+ years. During the conversation it transpired they are in the process of re-doing their wills. I found myself saying the following:

  • I think she needs to obtain US tax advice as my understanding is that there are strict limits on what a US citizen spouse can leave their non-US citizen spouse. Google research tells me it is $60,000 above which US estate tax is payable;
  • The way to avoid the above is for his wife’s will (if she pre-deceases him) to leave him her assets on what in the US is called a Q. Dot. trust. This stands for a ‘qualifying domestic trust.’ I said his wife will need US tax input but I think it means that:
  1. The trustees must be US citizens; and
  2. He can have a life interest in the Q. Dot [will] trust meaning for UK Inheritance Tax (‘IHT’) purposes, it qualifies for the UK IHT spouse exemption.

I suggested that their [Scottish] lawyers preparing their UK wills:

  1. access US tax advice to confirm the above;
  2. ask the relevant US professional to let them have a precedent for a Q. Dot. trust that can be included in her will; and
  3. ask the said US tax professional to review the included Q. Dot trust to check it does the job.

Sadly, the story doesn’t end here. If my understanding of the Q. Dot structure is correct (that it requires the trustees to be US tax residents) I suggested that in preparing her will,  they should receive answers to the following questions from the US and the UK

  • Should she and he own no assets jointly that pass automatically to the surviving spouse? Put another way should their house; joint bank accounts and joint investment accounts be held either as tenants in common or in sole names but not as joint tenants?
  • Will the Q. Dot trust be subject to US income tax and capital gains tax (‘CGT’) annually to 31st December?
  • If yes—what UK compliance is required to avoid double taxation? NB the UK tax year ends on 5th April;
  • If my friend (the surviving spouse non-US citizen) wants in his lifetime to receive trust capital from the Q. Dot trust – how is this taxed in the US? If taxed, what is his UK tax position? Does the US-UK estate and gift tax treaty assist; and if the distribution includes prior realised capital gains in the US tax resident trust-how does the UK tax such a distribution of ‘stockpiled gains’ from a CGT standpoint?
  • On his death, if the Q . Dot trust says the remaining trust capital passes to his and his wife’s two children (neither of whom are US citizens) – how will the US tax this distribution/the ending of the trust when money passes to a non-US citizen? How will the UK tax the same event? Might the US-UK estate and gift tax treaty assist? If the distribution includes prior realised ‘stockpiled’ capital gains in the US trust-how does the UK tax such a distribution from a CGT standpoint?
  • Should she want to consider renouncing her US citizenship in her lifetime and so ‘escape’ the above issues (if she died as a non US citizen, her will and assets would be outside the US tax regime save to the extent of her US situs estate). What is the US procedure for her to renounce her US citizenship? If she has to pay a US tax exit fee, is this creditable in the UK? What is the likely US tax cost for her to expatriate the US?

The ‘mischief’ the US is trying to protect itself against is a US citizen spouse (‘A’) leaving their wealth to a non US citizen spouse (‘B’) tax free with the result that on the death of B, no US taxes are due. The structure of the Q. Dot trust (it having US citizens as trustees) means that on the death of B the US Internal Revenue Service has a domestic US taxpayer within its compliance regime so all/any required US taxes can be paid/recovered.

We in the UK have a different but not dis-similar regime that applies when a UK domiciled spouse/civil-partner dies (or in their lifetime) transfers capital to a non-domiciled spouse/civil partner. Without advice/planning there is a real risk that UK taxes are due on such a transfer.

Where either assets are owned outside the UK or wealth is being given (in lifetime or on death) between spouses/civil partners who have different domiciles/citizenships; it is sensible  to check the tax repercussions are understood and planned for in advance of any such gift/transfer.

If you have any questions-please contact Robert Schon 020 7267 5010 rschon@streathers.co.uk

Now might be a good time for the owner of a privately held trading company or business to think about making lifetime gifts of shares/an interest in the business.

One of the reasons I find tax law interesting is because in crafting the legislation, frequently those who design it identify areas where a carve out from the general rule is desirable. An example is in Inheritance Tax (‘IHT’) where to date if someone dies or makes a lifetime gift and their estate/the gift comprises of shares in an unquoted trading company or business, that asset (as a general rule) passes because of IHT business property relief (‘BPR’) at a zero percent charge to IHT.

If a lifetime gift and the donor dies within 7 years, two conditions need to be satisfied being:

  • The original property gifted has been owned by the gift recipient throughout, between the date of transfer and the donor’s death (or earlier the death of the gift recipient); and
  • The original property (or in certain cases replacement property) still is ‘relevant business property’ meaning it qualifies for 0% IHT treatment because of the BPR rules.

There are similar rules for qualifying agricultural assets.

The logic for this relief is because it would disadvantage UK plc if e.g., X, the sole owner of a trading business worth say £4m, died and their estate was within IHT and £1.6m of tax was due on their trading business asset.

In September 2023 the Institute of Fiscal Studies issued its Green Budget. Chapter 7 is entitled ‘Reforming IHT’. Its recommendations as regards IHT BPR say as follows:

5. There are several problems with the current design of inheritance taxation. Reliefs for agricultural and business assets and certain classes of share open up channels to avoid the tax and are consequently costly and inequitable and distort economic decisions. There is a clear case for eliminating the special treatment of all of these types of assets.

6. Abolishing agricultural and business reliefs could raise up to around £1.5 billion a year. How much revenue would be raised is uncertain and depends on various factors including whether other channels are used to avoid inheritance tax. Making these changes together would reduce the scope for substituting one avoidance channel for another.

7. Four-fifths of the tax revenue from reform to business relief could be captured just by capping the relief at £500,000 per person, rather than outright abolition. Most business wealth is concentrated among those with high wealth, so the fiscal cost of an additional half a million pounds threshold for business wealth would be low, though the special treatment would remain unfair and distortionary.Around 90% of business wealth bequeathed is given as part of an estate worth over £2 million.

The present IHT BPR regime has no cap on the value of qualifying assets on death or in lifetime that can pass at a 0% rate of IHT. The shelf-life of this present generous regime is unknown and therefore owners of qualifying trading assets may want to consider passing on e.g., to children or a family discretionary trust qualifying assets especially if the intention is for the business/trading operation to continue well into the future.

The main IHT anti-avoidance rule concerning gifts with reservation of benefit needs to be kept in mind by the donor. In its IHT tax manual HMRC says in the context of lifetime gifts of qualifying IHT BPR assets: ‘The continuation of existing reasonable commercial arrangements in the form of remuneration and other benefits for the donor’s services in a business entered into before the gift does not amount to a reservation provided the benefits are in no way linked to, or affected by, the gift.

What is ‘reasonable’ will depend on all the facts but, broadly, HMRC should test this by reference to what might reasonably be expected under arm’s length arrangements between unconnected parties.

If, however, as part of the overall transaction, including the gift, new remunerative arrangements are made, HMRC will need to examine all the facts to determine whether the new package amounts to a reservation ‘by contract or otherwise’.

In other words, the donor can continue to work in the business and be paid on an arm’s length basis.

Capital Gains Tax (‘CGT’) and ‘qualifying gifts’

The CGT legislation contains reliefs for gifts of business assets by allowing the gift recipient to assume the CGT base cost of the donor. This relief is called ‘hold-over’ relief. To qualify the asset gifted must fall within one of the following categories:

  • Is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by:The donor, or Their personal company or A member of a trading group of which the holding company is the donor’s personal company; and/or
  • Consist of shares or securities of a trading company, or of the holding company of a trading group, where: The shares or securities are not listed on a recognised stock exchange, or The trading company or holding company is the donor’s personal company.

A ‘personal company’ means a company in respect of which the donor can exercise at least 5% of the voting rights.

There is no knowing if a future administration might seek to amend the present IHT BPR rules. Should it want to, the IFS Green Budget gives it some cover. There is no guarantee that any future changes in IHT BPR rules will be avoided by making e.g. lifetime gifts now. What is I think non-contentious is that as a general rule, the UK does not make its changes in tax law retrospective. 

Should you want to discuss anything raised in this note with someone from Streathers, please contact Robert Schon. Direct dial is 020 7267 5010 and email is rschon@streathers.co.uk

Guidance for grandparents when writing their will

Inspired by an item by Helena Luckhurst of the London law firm Fladgate LLP.

This note offers guidance to anyone who wants to leave assets to minor grandchildren in their Will. Its focus is making provision for minor grandchildren and the tax consequences of the different options. I will shortly write on the options for making provision in a will for minor children. This note is not exhaustive; for example, it doesn’t mention the special types of trust that may be available for minors who are disabled. Its purpose is to raise awareness of the different options available to grandparents when thinking about writing a will.

Where the client has children, most wills say:

  • All to my spouse/civil partner if s/he survives me;
  • If I am the second to die; all to my children in equal shares; and
  • If a child has predeceased me leaving a child or children, that child or children are to take the share of their deceased parent in equal shares.

Clients are frequently content for minors to inherit modest amounts outright. My experience is clients do not want a minor to inherit substantial sums at 18 or younger. It may be the last option described below is the most flexible choice. Grandparents must make their own decision from the alternatives described.

A bare trust for a minor – this is the only option available to a grandparent for a minor to inherit at an age younger than 18

If at the time of the grandparent’s death the grandchild is a minor, the only issue preventing the minor from taking their inheritance is the grandchild’s minority. Assets passing to the grandchild are, therefore, assented to a bare trustee(s) who will hold and manage the assets for the grandchild pending their attaining 18.

At 18 the grandchild is able to call for their inheritance. From the date of the grandparent’s death the inheritance belongs in law to the grandchild. For example, if the grandchild died whilst a minor their assets would be within their estate for Inheritance Tax (‘IHT’) purposes and would, as a general rule, pass under English intestacy rules.

Whilst the grandchild is less than 18 income or capital from their inheritance can be applied for their benefit. The grandchild will annually to 5th April be subject to income tax and capital gains tax (‘CGT’) on income or gains arising in excess of any available personal allowance or annual CGT exemption. The minor may need to file a tax return.

On the grandchild attaining 18 there is no IHT on the assets being transferred into their name from that of the bare trustee(s).

A key issue when drafting the will is who the grandparent appoints as bare trustee(s) pending their grandchild attaining 18. It is the job of the bare trustee to manage the grandchild’s inheritance pending the grandchild attaining 18.

Where the grandparent does not want to set an age for the minor grandchildren to inherit

Grandparents have 2 choices. Their will can either create an immediate post death interest trust (‘IPDI’) or a discretionary trust. Each has its own tax regime. Grandparents need to have these in mind in making their decision as to how they structure via their will how any grandchild inherits.

A discretionary trust

A grandparent preferring to keep their options completely open can provide in their will after their death for a minor’s inheritance to pass into a discretionary trust. The trust can last for up to 125 years and the class of beneficiaries can be very widely drawn to include for example all the heirs and their spouses/civil partners of the client’s parents. This breadth means inheritances can be reallocated between family members as the needs of the different family members become clear. It also allows inter-generational IHT planning because it allows family wealth to pass down the family tree (or between siblings) without the 40% IHT charge that can apply when a family member passes their wealth them self on their death to a family member.

The discretionary will trust trustees will usually be guided by written advice (a letter of wishes) written and signed in the lifetime of the grandparent to the trustees setting out the thinking of the grandparent(s) on when income and capital distributions should be made from the trust to a beneficiary e.g. for each grandchild to receive their share of capital at age 25.

Whilst assets remain within the discretionary trust, trust income or capital can be applied by the trustees to or for a beneficiary’s benefit both pre and post minority.

Discretionary trusts are subject to the IHT periodic charge regime throughout the lifetime of the will trust. In essence the trust fund is subject to a maximum 6% rate of IHT every 10 years from its creation and after the first 10 years it is subject to an IHT exit charge when assets leave the will trust. The rate of the exit charge depends on how long the assets have been in trust after the last 10 year anniversary and their exit from the trust. For example, a capital distribution after 15 years would trigger an IHT exit charge (at current rates) of 3%.

Gains realised on capital distributions from a discretionary trust to a beneficiary (e.g. when the trustees transfer shares or real estate absolutely into the name of a grandchild) can be deferred until the beneficiary disposes of the asset i.e. the gain can be ‘rolled over’ thereby deferring any CGT charge.

An IPDI

An IPDI is the vehicle for a grandparent who does not want their grandchild to inherit outright on their death and who does not want to have any IHT 10 year charge or exit charge applying to the minor’s inheritance while it is in trust-see above.

An IPDI must by law give the grandchild the right to the income of their inheritance as it arises-no matter what the age of the grandchild. The income is taxed as the grandchild’s.

The terms of the IPDI can provide for the trustees to be given the power to distribute the inheritance to the child at any age. The timing of capital distributions remains at the discretion of the trustees. The grandparent can however give guidance to the trustees via a letter of wishes as to the age they consider a transfer of capital to the grandchild appropriate. As with all trusts, the choice of who the client appoints as the IPDI trustees is crucial.

The flexibility an IPDI trust offers can be very helpful in protecting the minor as s/he gains financial maturity.

The price for avoiding the IHT 10 year charge and exit charge described above for discretionary trusts is that the IPDI assets form part of the IHT estate of the minor and will be subject to IHT whenever s/he dies and at whatever age. This risk can be covered by insurance.

The transfer of capital assets out of the IPDI trust to a beneficiary e.g. the minor on attaining 25 is a disposal for CGT purposes for which the gain usually cannot be deferred. CGT will be payable at the trustees’ rate of CGT being presently 20% unless the asset being disposed of is e.g. a buy to let residential property when the rate is 28%.

The grandparent keeping their options open

A discretionary trust can be included in the grandparent’s will with a power to appoint capital onto different trusts. The IHT and CGT law allows the trustees of the discretionary will trust to have up to 2 years after the grandparent’s death to turn the trust into any of the options described above. For IHT and CGT purposes the consequences will be the same as if the grandparent’s will had included that option in the first place. The key is for the grandparent to trust their choice of will trustees to make the right decision when the time comes. The grandparent can write them a letter of wishes to set out their thinking but the decision will be that of the will trustees.

Concluding thoughts

I am embarrassed at the complexity of this topic. It may be the grandparent(s) should consult each of their children and agree together for each child the approach they think best serves that child’s family.

I enjoy helping a client write their will. I describe a will as being the last communication of love one leaves.  As such (in my opinion) it should seek to minimise family division and be as useful as possible. Only the person writing their will can look at their family and their loved ones and decide in the light of the choices available what they think is likely to work best for their heirs. If you think I might be able to assist you, please get in touch.

Robert Schon