No reprieve for £1 million BPR/APR allowance

The technical consultation on the £1 million proposed combined Business Property Relief (BPR)/Agricultural Property Relief (APR) 100% allowance as announced at Autumn Budget has finally been launched. The consultation is open for responses until 23 April 2025.

There has been no change of heart, (unless they are saving it for Spring Statement) in terms of the monetary limit or the rigidity of certain key characteristics.

Client firms across the UK have indicated that these proposals are creating significant distress particularly for owners of family agricultural business where farming is frequently seen as a family tradition, with land passed down through generations. Yields can be low so an Inheritance Tax (IHT) bill would be the last straw for the next generation.

However, date evidence shows that farm estates are also owned by non-farmers (investors and celebrities) for IHT planning purposes. It is certainly worth reading the Tax Policy Associates article published 24 November 2024 about alternative approaches to achieving the government’s aim to stopping avoidance whilst also protecting family farms.

https://taxpolicy.org.uk/2024/11/24/how-to-stop-iht-avoidance-but-protect-farmers/

For individuals

The rigidity, I referred to can be summarised as follows:

First, there is no proposed transferability of the allowance between spouses /registered civil partners as there is for the general nil rate band (NRB) and residence NRB. This has been widely criticised, not least because it could force the fragmentation of businesses and farms. In a recent Mercia client survey practitioners overwhelmingly supported such transferability and it is expected the formal responses to the Consultation on this matter will be equally vocal.

This means that all eligible family companies and businesses will need to plan carefully to ensure that each person uses their available £1 million allowance.

Second, the £1 million allowance will be allocated on a chronological basis, starting with the earliest chargeable transfer to which these rules apply, including failed potentially exempt transfers (PETs). The problem with this is that a PET of £1 million which fails late in the seven-year cycle, say between six and seven years, will use up the 100% allowance. If there was no allowance at all available, (ignore NRB) then the taper relief discount of 80% on the IHT bill would result in IHT of only £80,000 (this would be £40,000 if we could allocate 50% relief).

Meanwhile, a further £1 million of relevant business or agricultural property in the estate after 50% BPR/APR would suffer a £200,000 charge! In other words, the bulk of the precious £1 million allowance is wasted! It would be more equitable to allow flexibility of allocation as this cliff hanger effect may deter some clients from making lifetime succession transfers.

What about trusts?

Those that understand trusts know that whilst they may be a useful IHT planning tool they are not miracle workers. The initial announcement stated that existing trusts on 29 October 2024 would each have a £1 million allowance but that for new trusts there would be a single available £1 million allowance.

The Consultation provides more detail about how the trust aspects will operate in respect of exit charges and ‘ten-year anniversary’ rules from 6 April 2026. I am not covering that detail here but it also states that APR/BPR trust assets (where trust created pre-30 October 2024) will continue to attract unlimited 100% relief on IHT exit charges until the date of the trust’s next ten-year anniversary which falls on or after 6 April 2026. In certain cases, this could be a delay of several years.

Surprisingly, it looks like pre-existing trusts that contained qualifying APR/ BPR assets on 29 October 2024 will be able to top up.

‘Such trusts will each benefit from the £1 million allowance from 6 April 2026 even if the settlor transfers further qualifying agricultural or business property to more than one of these trusts.’

However, the usual caveat is issued here as this is not draft legislation just a statement within the Consultation.

For new trusts established from 30 October 2024, great care will be required in planning as the £1 million allowance will be allocated in event date chronological order. If this is initially used by one particular trust for example, it remains with that trust for its duration, even if it has distributed its APR/BPR asset.

As these developments continue to unfold, we will update you as to their progress. For full details of the Consultation, see here.