As you may be aware, changes came into effect in April 2026 that severely reduced the efficacy of Business Relief and Agricultural Property Relief. In the build-up to these changes, most people focused on acting before 6 April 2026 to reduce their IHT liability. However, many business owners, farmers and their families overlooked the impact that these changes would have on pre-existing trust structures.

Some business owners with assets already in trust may still have a valuable opportunity to lower future inheritance tax bills.

What has changed?

Most trusts are subject to periodic inheritance tax charges. These take place on each 10-year anniversary of the trust being settled or on an appointment of capital out of the trust.

Historically, where trusts owned shares in unlisted companies, Business Relief could be claimed to mitigate these IHT charges. However, as a result of the changes mentioned above, there will be many instances where trusts will have to fund significant IHT charges.

This issue is compounded because the trust often has only one way to fund these charges: receiving a dividend from the underlying company, which will be subject to tax itself. This poses a huge issue for the company as it may create a significant outflow of funds, particularly as companies are valued on an enterprise basis and that value can dwarf the balance sheet value of the company.

A simple example

Example 1 – Appointment pre-initial 10-year charge following 6 April 2026

The two shareholders of a family owned trading company establish a trust on 31 March 2020, settling shares in the company worth £10 million for the benefit of their adult children.

The decision is made to appoint those shares to the children in 2028.

The appointment is chargeable for IHT purposes. However, as the trust remains subject to the ‘old rules’ 100% BR on the full value of the shares reduces the value transferred to nil.

As a result, there are no IHT charges on the appointment.

Example 2 – Appointment following the initial 10-year charge post 6 April 2026

The background is the same as set out above, however, instead of appointing the shares in 2028, the trustees choose to appoint them in April 2032.

The Ten Year Charge

As the trust will continue to hold the shares in the trading company, there will be a ten year anniversary charge in 2030.

As this will be the trust’s first such charge following the April 2026 changes, the BR allowance will only apply to complete quarters which fall on or after 6 April 2026 meaning an adjustment must be made to the charge to reflect this.

Assuming the value of the shares remains £10million, the exit charge would be £82,200, calculated as follows:

• Taxable transfer: £3.75million
  • (£10million – £2.5million (BR allowance) – £7.5million (50% BR)).
• £3.75million less nil rate band of £325K = £3,425,000
• IHT @ 20% = 685,000
• 685,000/3,750,000 = 18.27%
• 18.27% x 3/10 = 5.48%
• Adjustment for BR changes:
  • Complete quarters from settlement to 5 April 2026: 24
  • Complete/partial quarters from 6 April 2026 to 10 year anniversary: 16
  • Modified rate: 16/40 x 5.48% = 2.19%
• £3,750,000 @ 2.19% = £82,200

The Exit Charge

Following the ten-year charge in 2030 the trust is fully within the new rules.

As such the trustees’ 100% BR allowance is restricted to £2.5 million and the value transferred on the appointment will be £3.75 million. Ascertaining the rate of tax on an appointment can be complex, broadly however the rate is determined via the following formula:

Effective rate at the last ten year anniversary x 30% x n/40 = actual rate of tax

‘N’ in the above is the total number of complete quarters that have elapsed since the last ten year anniversary and the date of the appointment. The actual rate of tax is then applied to the value of the capital distribution from the trust.

Distributions made from the trust following the first post 6 April 2026 ten year charge will be subject to new exit charge rules. Broadly, the rate of IHT for exits following the ten year anniversary will be based on unrelieved values rather than relieved values. Therefore, the effective rate of tax at the ten year anniversary will be 5.81% (rather than 5.48%).

On this basis, the rate of tax applicable to the exit charge will be:

• £5million x (5.48% x 30% x 8/40) = £16,440

The trustees will require a dividend from the company to fund payment of both IHT charges and will be taxed on receipt of those dividend, meaning the company will need to distribute sufficient funds to cover both the trustee’s income tax and IHT liabilities.

Not only does this impact on the company’s balance sheet, but there are income tax and IHT charges payable by the trustees.

It can be seen that making the appointment in 2032 is substantially more costly than the comparable appointment in 2028, which requires no distribution from the company to be made.

What can you do now?

1. Accept and plan for the new position, and plan your cash flows for these events.
2. Even if you believe you’ve missed the April deadline, the good news is that if you appoint the assets out before the next 10-year anniversary date, the old Business Relief regime will apply.

Questions business owners should ask now

If you have business assets in trust, now is a good time to ask:

• Is the trust/business able to afford these charges moving forward?
• Is it appropriate for the beneficiaries to receive the assets at this point in time?
• Would an appointment out of trust improve the position?
• Does this still align with the family’s succession plans?

Summary

The pre-April 2026 deadline mattered, but it was not the end of every IHT planning opportunity.

For some business owners and farmers, the better question now is not “Did we miss our chance?” but “Is there still an opportunity to save on IHT?”

Inheritance tax planning depends on individual circumstances, and the rules around trust tax reliefs are complex. Our advice is to seek professional advice before taking action.

If you want more information on whether IHT opportunities still remain or you need assistance with IHT and succession planning, contact Barnes Roffe today.

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