Navigating the new trusts landscape — key insights for business owners’ estate planning

The recent consultation on trusts has brought welcome clarity to how the changes to inheritance tax (IHT) will interact with trusts created both before and after ‘budget day’ — although many questions remain. From the application of the £1m allowance to the intricacies of exit charges when funds leave a trust that contains business property, understanding these new rules is crucial for effective estate planning. 

Our experts have responded to this consultation to ensure that we’re speaking up for the business owners and entrepreneurs we represent who have been (and will be) affected by the proposed changes — and in the hope that we can help to shape these impactful new rules.

Here, Steven Appleton breaks down the key points from the consultation and offers his insights on how the changes could affect you and create additional planning headaches.

A game changer for business and farm owners

Changes to the taxation of business and agricultural property announced by the Autumn Budget in October 2024 were a game-changer for many of our business and farming clients. 

Whereas such assets can be left to the next generation free of IHT if you die on or before 5 April 2026, deaths after this date will cause IHT of up to 20% to become payable.

Trusts are commonly used by business owners to hold shares in family businesses — mostly to ensure effective control of the business and protect it from the personal circumstances of younger generations of the family (such as personal insolvency, poor financial management and divorce). 

Since the use of trusts is so endemic, it was essential that practitioners were given as much opportunity as possible to understand and respond to the proposals — hence the consultation.

The £1m allowance

Under the new rules, from 6 April 2026 the first £1m of business property will benefit from full IHT relief. This means that the allowance will become incredibly valuable as part of arranging the affairs of a business owner.

In relation to trusts, the Government has confirmed that the allowance will apply to transfers made on or after 6 April 2026 and refreshes every seven years — meaning that £1m of business property can be added to a trust every seven years. 

However, it's important to note that this allowance isn’t transferable between spouses and civil partners. This could lead to complex planning scenarios, similar to those seen before the introduction of the transferable nil rate band in 2007 where the first spouse to die was forced to set up a complex trust in their Will to avail of all allowances. This system favours those who seek quality advice over those who either can’t afford to do so or don’t know to do so.

The lack of transferability will also mean that family business owners may be forced to transfer shares that have always been held for bloodline inheritance only to their spouse (so as to benefit from two £1m allowances). This will create risks for the business, which may then rely on the continued strength of that relationship.

Navigating ten-year anniversary and exit charges

The rules surrounding the £1m allowance for ten-year anniversary charges and exit charges are relatively complex and depend on when the trust was set up and when funds exited the trust. 

For trustees, understanding the valuation methodologies for unlisted shares and the complexities of business valuations is crucial. Specialist advice will be needed to ensure accurate calculations and compliance with HMRC requirements. 

We foresee huge backlogs at HMRC, which — for the first time since 1996 (when 100% business relief was introduced) — will be forced to check and interrogate valuations of businesses that formerly qualified for full IHT relief.

Standardising exit charges

One of the proposals in the consultation is to standardise the calculation of IHT exit charges based on unrelieved values. This change aims to simplify the process but would result in higher rates of tax on exits from a trust. 

Transitional provisions for trusts

The transitional provisions for qualifying agricultural and business property settled into trusts before 30 October 2024 create three mini regimes for calculations. This complexity could lead to errors by trustees, especially with exit charges. 

Trustees will need professional help to navigate these provisions and ensure accurate calculations.

Single £1m allowance for multiple trusts

The allocation of a single £1m allowance for multiple trusts settled after 30 October 2024 (budget day) aims to prevent the fragmentation of business property. 

While this approach promotes fairness, it also introduces complexity. Trustees — who might be different for different trusts — must act carefully to ensure that the allowance is applied correctly and equitably.

Related property provisions

Current legislation treats business property owned by spouses or civil partners as ‘related’ for valuation purposes. This means that if they each own 50% of a company, although a 50% share would ordinarily be discounted to reflect a lack of control, their holdings are added together (meaning no discount). 

There’s a proposal to widen this legislation to treat all trusts created by the same settlor as ‘related’. So, if the same settlor puts 25% of their shares into four different trusts, no discounts would apply as the trusts are considered together for valuation purposes. 

It’s not entirely clear whether this will impact trusts created before budget day (which would seem manifestly unfair if so) or indeed whether trusts created via the person’s Will and trusts that they’ve created during their lifetime would be treated as related. There’s also no clarity on whether the rules would extend to treat business property held personally by the settlor or their spouse and that which they’ve put into trust. 

Special trusts and age 18 to 25 trusts

If a business owner dies and leaves their shares into a discretionary trust, that trust will be subject to tax as funds leave the trust and on its ten-year anniversary. Depending on the circumstances, the trust will benefit from a £1m allowance which may help relieve that tax burden.

If instead, the business owner leaves their shares into a trust that says their children would inherit the shares aged 25, tax would also be payable as the beneficiary reaches the age of 25. This is known as an ‘18-25 Trust’. However, here the £1m allowance will apply per beneficiary, potentially creating a radically more favourable tax outcome when compared with the use of a discretionary trust. This could make 18-25 trusts more attractive for planning, though parents must consider whether their children are ready to inherit substantial assets at 25.

Minimise the impact

The new rules on trusts and the £1m allowance present both opportunities and challenges for business owners. Careful planning and professional advice are essential to navigate these changes and ensure effective estate planning. 

However, at the time of writing, there remain many unknowns with limited certainty around when the position will become clear. By working with professionals who are leading the conversation, business owners stand the best possible chance of minimising the negative impacts of this new regime.

If you need advice, our experts are here to support you. Talk to us today by giving us a call on 0333 004 4488, sending us an email at privateclient@brabners.com or completing our contact form below.