Introduction
The Government’s overhaul of Agricultural Property Relief (APR) and Business Property Relief (BPR) has sent shockwaves through the farming community and family business sector.
With the new restrictions taking effect for deaths after April 2026, landowners and business owners face an inheritance tax headache that their parents’ generation never encountered.
But careful planning, particularly around discretionary trusts, may offer some partial solutions.
The New Landscape
For decades, APR and BPR provided near-complete relief from inheritance tax (IHT) for qualifying agricultural land and business assets.
A working farm worth £5 million could pass between generations tax-free; a family trading company worth £10 million could transfer without a 40% IHT charge.
These reliefs were designed to prevent forced sales and maintain the continuity of family enterprises.
The reformed reliefs, announced in the 2025 Budget and now in force, impose significant restrictions:
- Value cap: Relief is now limited to the first £1 million of combined APR/BPR assets per individual. Beyond this threshold, only 50% relief applies, exposing the excess to IHT at 20% (effectively halving the normal rate).
- Active management requirement: For BPR, stricter tests now apply to demonstrate “active” business involvement, targeting passive investment holdings that previously qualified.
- Minimum ownership period: The qualifying ownership period has been extended from two years to five years in certain cases.
- Lifetime gift changes: Potentially exempt transfers (PETs) of agricultural and business property now follow modified rules, with the seven-year clock only starting after a more restrictive “material change” test.
For a £5 million farm, the numbers are stark. Under the old rules – no IHT.
Under the new rules:
- £1 million qualifies for 100% relief;
- £4 million qualifies for 50% relief (IHT exposure of £2 million);
- tax payable approximately £800,000.
This is a transformative change.
Why Discretionary Trusts?
Discretionary trusts have long been used in wealth planning, but the APR/BPR changes make them particularly relevant. The key advantages:
- Lifetime transfer: Assets transferred into trust during lifetime can begin their qualifying period for relief immediately, and may fall out of the estate entirely after seven years.
- Flexibility: Unlike outright gifts, discretionary trusts allow the settlor to retain influence over how assets are used and who ultimately benefits.
- Generation-skipping: Trusts can benefit multiple generations, potentially avoiding multiple IHT charges as assets pass down the family.
- Protection: Assets in trust are protected from beneficiaries’ creditors, divorce claims, and their own poor financial decisions.
However, discretionary trusts are not magic bullets. They have their own tax regime, including entry charges (20% on amounts over the nil-rate band), periodic charges (up to 6% every ten years), and exit charges, that must be weighed against the potential IHT savings.
Strategic Planning Options
Several strategies are emerging as practitioners adapt to the new rules:
1. Phased Gifting into Trust
Given the nil-rate band for trust transfers (currently £325,000 every seven years), one approach is systematic gifting over time. A couple could potentially transfer £650,000 into trust every seven years, gradually reducing their estate while the seven-year clock runs on earlier transfers.
For larger estates, this is a slow process. A £10 million estate would take decades to transfer fully. But combined with other reliefs and allowances, phased gifting can make a meaningful difference.
2. Reservation of Benefit Issues
However, there is a critical trap. If the settlor continues to benefit from assets transferred into trust (for example, continuing to live in a farmhouse that has been gifted), the gift with reservation of benefit (GROB) rules apply, keeping the asset in the estate for IHT purposes. Careful structuring is essential to avoid this pitfall.
Options include paying full market rent for any continued occupation, or structuring the transfer so the settlor’s continued involvement is as a genuine arm’s-length transaction. Professional valuation and documentation are essential.
3. Using the Reduced Relief
Even where full relief is not available, the 50% relief above £1 million still provides significant tax reduction. An estate with £5 million of qualifying business assets pays IHT at an effective rate of approximately 16% rather than 40%. Planning should optimise use of available relief rather than abandoning it.
4. Life Insurance
Where IHT cannot be eliminated, life insurance written in trust can provide liquidity to pay the bill without forcing asset sales. Premiums are typically affordable, especially when considered against the alternative of a 40% tax charge. Whole-of-life policies with guaranteed premiums offer certainty of coverage.
5. Incorporation and Share Structures
For unincorporated businesses, incorporation may offer planning opportunities. Shares in a trading company can qualify for BPR, and sophisticated share structures (such as freezer shares that cap value, with growth shares held by the next generation) can achieve effective succession while managing IHT.
Agricultural businesses may face additional complexity due to the interaction between APR and BPR, and professional advice is essential before incorporating farmland into a company structure.
The Liquidity Challenge
Even with the best planning, many families will face IHT bills that cannot be avoided entirely. The question then becomes: how to pay?
Assets within the IHT regime can benefit from instalment arrangements where tax on land or business assets can be paid over ten years. This provides breathing room, though interest accrues on unpaid amounts.
For farms and family businesses, the worst outcome is forced sale of productive assets to pay tax. Liquidity planning—building cash reserves, arranging standby credit facilities, or using life insurance—should be part of any succession strategy.
Anti-Avoidance Risks
Planning in this area must be approached with care. HMRC has extensive anti-avoidance powers, and structures that appear designed solely to circumvent the new restrictions may be challenged by various means.
Any planning should be implemented for genuine commercial and family reasons, with professional advice and proper documentation.
“Artificial” arrangements purely to avoid tax are increasingly vulnerable to challenge.
Act Now
The critical point for families affected by these changes is that planning takes time. Transfers need qualifying periods to run; trusts need time to become effective; seven-year clocks need to start. Delaying planning until a health scare or advancing age forces action is rarely optimal.
For farms and family businesses with significant value above the new thresholds, the conversation should begin now. Professional advisers such as solicitors, accountants, and tax specialists should be engaged to model the options and implement appropriate structures.
The APR/BPR changes represent the biggest shift in IHT for business and agricultural assets in a generation. Those who plan proactively will preserve more for the next generation; those who wait may face stark choices when the time comes.
If you have concerns about inheritance tax planning for agricultural or business assets, please do not hesitate to get in touch.