Tag: Wills

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

October 2024 budget – impacts on drafting wills

The October 2024 budget (‘the Budget’) and how it may impact the drafting of the will of a shareholder in a non-quoted trading company (‘X Ltd’); a member of a trading partnership or a self-employed trader.

Setting the scene

The senior partner of a City law firm once said to his partners ‘we don’t run the firm for the 150 or so of us but for the 5,000 or so people who are dependent on the firm for their livelihood’. He was including within the 5,000 the children and spouses of his colleagues. 

If X owns an interest in a trading business and in particular if it has employees, in considering X’s will and lasting power of attorney finance X should we suggest take steps to try and ensure that if X dies or ceases to have capacity; their owned trading asset(s) will continue as best they can without X meaning (amongst other things)

A) the livelihoods of their employees are secure; and

B) the capital wealth they have built up for their heirs is enjoyed.

The IHT position before the Budget for qualifying trading assets 

Before the Budget (and up until 5th April 2026) if the owner of an interest described above in the title dies and there is no binding contract in place for the sale of their trading asset(s); its value as a general rule passes at a 0% rate of Inheritance Tax (IHT).

How the Budget changed things 

From 6th April 2026 the above ceases to be the case once the value of the trading asset(s) included in the IHT estate of the deceased (‘X’) exceeds £1m. If it passes to X’s IHT qualifying surviving spouse/civil partner (‘spouse’) (broadly someone who has been UK tax resident for 10+ years or who has made the required IHT election so to be treated) it will be IHT exempt otherwise the excess: above £1m will incur IHT at 20% with such tax being due 6 months after the end of the month in which X dies. From 6th April 2025 interest is due to HMRC on any unpaid balance at 4% above the Bank of England base rate which is currently 4.5% meaning today interest of 8.5% would be due on unpaid IHT.

We are concerned that post 6th April 2026 funding this IHT due on X’s trading asset(s) (now within IHT in X’s estate) is likely to mean that 

A) the administration of X’s estate will take longer to close in that the estate administration can only end once all estate debts including IHT due have been settled; and

B) X will need to be even more careful in their selection of executors as the liability to meet the IHT due will rest on them and they will also control X’s interest in each qualifying trading asset within X’s estate meaning, for example, they could vote their shareholding to appoint their representative(s) to the board of X Ltd and vote themselves dividends to help meet the IHT due. 

After X’s death it will (as today) fall on the shoulders of X’s appointed executors to ensure there is no hiatus in the day to day running of the trading asset(s) in X’s estate and to do their best to ensure value(s) do not decline post X’s death. From 6th April 2026, a major difference to today is that X’s executors will need cash to fund the IHT due on X’s qualifying trading asset(s).

Typical pre-Budget planning in structuring X’s will

As X’s interest in their trading asset was assumed to pass at a 0% rate of IHT and on the assumption that post X’s death X’s interest in that asset would be sold, it was common for X’s will to leave their assets qualifying for 100% IHT business property relief to a discretionary trust created in the will so in due course

A) The sales proceeds would pass to the trustees of that will trust;

B) The sales proceeds would not be in the IHT estate of X’s surviving spouse at a likely IHT rate of 40% on that spouse’s death; albeit

C) During the surviving spouse’s lifetime s/he would be the important will trust beneficiary and also in all likelihood a trustee.

Post 5th April 2026, qualifying assets left to such a discretionary will trust will incur an IHT entry charge of 20% on the excess value above £1m compared to 0% today. We suggest such wills in place today need reviewing.

Post 5th April 2026 how might X’s estate fund the IHT due on qualifying assets within X’s estate?

There will be a number of options open to X’s executors. These may include (in no particular order) one or more of the following:

i) Other assets in X’s estate which are either liquid or can be realised being sold to help fund the IHT due;

ii) A sale of some or all of the qualifying trading assets);

iii) The proceeds of a life insurance policy ideally written in trust to pay out on X’s death being used to help finance the IHT due;

iv) The executors borrowings from a bank and/or a beneficiary; and/or

V) Their electing to pay some or all of the IHT due on the qualifying trading asset(s) by up to 10 annual (interest bearing) instalments.

Conclusion

A lot can be achieved by good advance legal planning. If we can be of help please get in touch. In the first instance please contact Robert Schon at rschon@streathers.co.uk or on 07749 051312

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