Application of the new '£1m allowance' to trusts and lifetime gifts - part 1 - 20th October 2025

In this bulletin, we examine the new rules which will, from 6 April 2026, operate to restrict 100% relief from IHT to the first £1m of business and agricultural property as they apply to trusts and lifetime gifting and highlight some interesting quirks in the draft legislation that may have gone unnoticed.

Reforms to IHT business relief (BR) and agricultural relief (AR) announced in the 2024 Autumn Budget mean that from 6 April 2026, a new £1 million cap on 100% relief from IHT will apply to an individual’s combined qualifying agricultural and business assets; with qualifying assets in excess of the £1million allowance eligible for relief at 50% only. 

With many businesses and farms worth well in excess of the £1m figure, business owners and farmers alike are unsurprisingly keen to explore options for mitigation - and the most obvious way to mitigate IHT is to make lifetime gifts (either outright or to a trust) to reduce the value of the estate on death.

When it comes to making gifts of business or agricultural property, professional advice will be essential as there are many important tax and non-tax considerations that need to be thought through before action is taken. But on the assumption that gifting has been determined appropriate taking account of the client’s specific circumstances, there are several important nuances in the new legislation that clients and their advisers need to be aware of. To avoid repetition, the term ‘qualifying property’ is used throughout the remainder of this bulletin to mean business or agricultural property that will (subject to the £1m allowance) qualify for 100% relief from IHT post-6 April 2026.

Lifetime gifting

While lifetime gifts of qualifying property made before 30 October 2024 (or after 30 October 2024 with death occurring before 6 April 2026) will benefit from the existing rules and will not be subject to the cap on relief; lifetime gifts of qualifying property made after 30 October 2024 with death occurring after 6 April 2026 will use a proportion of the transferor’s £1m allowance – thereby reducing the amount of 100% relief available to any qualifying business or agricultural property remaining in the death estate.

For example, a lifetime gift to e.g. children on 1 October 2025 of shares in an unquoted trading company worth £2,500,000 will represent a failed potentially exempt transfer (PET) if the donor dies on e.g. 1 February 2028 with relief of 100% only applying to the first £1,000,000. The remaining £1,250,000 of the failed PET - as well as any qualifying property forming part of the death estate – will benefit from relief at the lower 50% rate only. 

The proportion of the failed PET that is not relieved will use the nil rate band (assuming that it has not been used on earlier chargeable transfers or failed PETs) with the balance subject to 40% IHT (less any taper relief if the PET has been survived by more than 3 years).

The availability of relief to a failed PET or chargeable lifetime transfer (CLT) assumes that the transferee still owns the qualifying property at the date of the transferor’s death. Where the qualifying property has been sold or otherwise disposed of in the interim period, relief will be ‘clawed back’ in accordance with s113A/s124A IHTA 1984. On first analysis of the draft legislation, it would appear that even where relief is clawed back, the relevant proportion of the allowance is still used if the transfer was a chargeable transfer (but not if it was a PET). This is a consequence of the different way that the clawback rules work depending on whether the original transfer was a CLT or a PET.

One piece of good news though, is the confirmation in the consultative document published on 27 February 2025, that the £1m allowance for individuals will refresh every seven years on a rolling basis in a similar way to the nil rate band. This provides younger business owners and farmers who are in good health with the opportunity to pass qualifying property well in excess of £1m to the next generation over a longer period without any IHT at all. For example, a 60-year old business owner with an unquoted trading company valued at £3m, could conceivably gift shares to the value of £1m to children today, a further £1m to children in 7 years’ time and the remaining £1m to children on death if he also survives the second gift by 7 years. All without any IHT becoming payable either in his lifetime or on his death. Of course, capital gains tax and other tax and non-tax considerations may apply depending on his circumstances and independent professional advice will therefore be necessary to determine the suitability of this strategy.

Trusts

The trustees of relevant property trusts are liable to an IHT charge of up to 6% of the value of property held in a trust every ten years. There is also an exit charge when property leaves a relevant property or 18-25 trust. However, where the trust assets comprise business or agricultural property, BR or AR can apply to provide IHT relief from these charges. Currently, the amount of relief available on qualifying property is unrestricted; however, from 6 April 2026 the amount of relief available at the 100% rate to trusts holding business or agricultural property will be limited. 

Although it has been widely publicised that trusts created on or after 30 October 2024 will benefit from 100% allowance of ‘up to’ £1m – thereby providing potential for a married couple to pass up to £4m of qualifying business and/or agricultural property to the next generation without IHT charge - the devil, as always, is in the detail.  

To take the simplest case where qualifying assets to the value of £1m are transferred to a single settlement post-30 October 2024, the trust will, indeed, benefit from a £1m 100% allowance. 

However, it is important to note that a trust’s allowance will be set at outset and will be equal to the amount of qualifying property transferred to that trust up to a maximum value of £1m. Once a trust’s allowance is set, it can only be increased to the extent that further business or agricultural property that qualifies for 100% relief in the hands of the transferor is added to that trust.

So, for example, if a settlor (with at least £300,000 of his £1m allowance available) establishes a trust with £300,000 of unquoted shares in a family trading company, the trust’s allowance will be set at £300,000 unless and until further qualifying property is transferred to the settlement. Thus, if the value of the shares increases to £900,000 by the ten-year anniversary (TYA) (and no further qualifying property has been transferred to the trust in the interim) the excess over £300,000 will only benefit from relief at 50% with any unrelieved excess subject to a periodic charge to the extent that it exceeds the trust’s nil rate band. We will look at periodic and exit charges on trusts holding business property in more detail with examples in a separate bulletin.

Another interesting consequence of defining the trust maximum allowance as (broadly) the amount of qualifying property transferred to that trust, is that if a settlor establishes a trust with, say, £300,000 of cash which is subsequently invested in qualifying property, no relief at the 100% rate will be available to the trustees on a subsequent exit or 10-year anniversary charge!

Where a settlor sets up several trusts on or after 30 October 2024, an anti-fragmentation rule will ensure that the allowance is shared between them in chronological order of establishment (or on a pro-rata basis if established simultaneously). Furthermore, once a proportion of the trust £1m allowance is allocated to a trust, that ‘used’ proportion will not be available to later created trusts (even if the earlier trust or trusts are wound up).

Where more than one trust comprising qualifying business property and/or agricultural property has been established by the same settlor before 30 October 2024, each trust will have a £1 million allowance for 100% relief. 

More generous rules also apply to 18-25 trusts, while the allowance available to trustees of disabled trusts and qualifying interest in possession trusts is referable to the beneficiary, and not to the trustees.

Source: Techlink Professional. This is a news bulletin and is up-to-date as of the date of publishing. Please check the publishing date at the top of the article.