It seems the legislative changes to cap Inheritance Tax reliefs to £1m per person from 6 April 2026 will be going ahead. With reasonable sized estates there will now be Inheritance Tax liabilities whereas before possibly not.
The easiest way to mitigate the effects of IHT is to gift the asset away. If not, then the rate of IHT on relievable assets will be effectively 20%, this is based on 50% relief against the 40% IHT levy rate for any value above the £1m. Some people will no doubt take the view that farmland is still a good investment to achieve a 50% tax discount on death and may not worry about gifting. Others may not be able to afford to gift the assets away or perhaps they are not decided who to give the asset to. In this case, a Discretionary Trust may well be a useful tool – a well thought out and drafted Trust Deed, with good Trustees who really add value, can work exceptionally well. So, what’s the catch?
Up until 6 April 2026 an unlimited amount of relievable land and property can potentially be settled to a Trust without any lifetime tax. After that date only up to £1m per settlor may be settled before the lifetime rate of IHT is levied on that exceeding the cap. The lifetime rate is currently 20% as opposed 40% death rate. Therefore, from April 2026 any relievable value over £1m will have an effective rate of 10% i.e. 50% relief against asset value over £1m before the 20% lifetime IHT levy rate. As a landowner settling to Trust, much as with gifts to individuals, any benefit from that land must be forgone, but control of the asset and income arising can be retained. To show this, the settlor could rent the land from the trust on an FBT or perhaps reduce partnership profit share following the settlement if the Trustees were also partners.
Once in the trust, then as with a gift, the 7-year clock ticks and if survived then the asset is out of the estate but with a difference – it can still be controlled and can even sit there missing out a generation. Every 10 years there will be a centennial IHT tax charge, but this may be no more than an effective rate of 3% above the value of £1m. There may be exit charges if it’s decided to distribute the assets to the beneficiaries but again not at excessive amounts. After all, if the assets stay in a trust through the generations it takes many years at 3% to reach 40% or even 20%!
If this sounds like a viable option for your situation then time will be of an essence. To get the right tax advice, proper valuations and legal work will take a few months and good professionals are not short of work!
The team at Berrys is very much involved with many family farming businesses and the strategic advice around succession planning. We work within a team of key advisers often helping manage the process to what is ultimately a sound solution, not just in terms of tax outcome.
Please contact John Thame in the first instance on 07887 871038 email john.thame@berrys.uk.com and don’t leave it too late!