Following the Budget announcements, there had been some concern that the £1m would be a lifetime allowance; however, the consultation confirms that the allowance for individuals will refresh every seven years on a rolling basis, similar to how the inheritance tax nil rate band (i.e. the threshold – currently a maximum of £325,000 – below which an individual’s estate does not pay inheritance tax) currently operates. For trusts, the allowance will refresh every 10 years, meaning that qualifying property held within a trust will benefit from 100% relief up to a value of £1m on each 10-year anniversary charge.

Any unused portion of an individual’s nil rate band (and residence nil rate band) is transferable between spouses and civil partners, thereby enabling couples to leave their entire estates to each other (with such transfer benefiting from the spouse exemption from inheritance tax) without losing the benefit of the nil rate band from the estate of the first spouse to die. This simplifies will arrangements and the administration of estates.  

It was therefore surprising that both the policy paper and consultation state that “any unused allowance will not be transferable between spouses and civil partners”. Such a stance is likely to encourage the fragmentation of businesses and farms (as couples will wish to ensure that they are both able to take advantage of their own £1m allowances) which appears contrary to other proposals (mentioned below) by the Government to discourage such fragmentation.  

It is proposed that transfers made before 6 April 2026 will benefit from various transitional arrangements. Key points to note are as follows.

• Pre-30 October 2024 transfers are unaffected by the reforms and will be subject to existing rules.
   
• Transfers made between 30 October 2024 and 6 April 2026 (the “transitional period”) will be retested under the new rules (with the benefit of the £1m allowance) if the transferor dies on or after 6 April 2026 and within seven years of the transfer. 
   
• Trusts established before 30 October 2024 will continue to attract unlimited 100% relief in respect of exit charges on qualifying APR or BPR property until the date of the trust’s first 10-year anniversary falling on or after 6 April 2026. Depending on 10-year charge dates, this could give trustees and beneficiaries significantly more time to dismantle trust arrangements (if the prospect of future 10-year charges is unpalatable) without incurring an exit charge.
   
• Trusts established prior to 6 April 2026 are offered a proportionate reduction to their first 10-year charge under the new regime to take into account the period before 6 April 2026 when agricultural or business assets within the trust qualified for unlimited 100% relief. This is a welcome proposal and should avoid an unattractive “cliff edge” effect, whereby two trusts established only a few days apart would be subject to entirely different inheritance tax outcomes, with one suffering its first 10-year charge under the new regime shortly after 6 April 2026 whilst the other’s first 10-year charge under the new rules does not arise until early 2036.

The consultation notes that, in the absence of any anti-avoidance rules, individuals could establish multiple trusts before 6 April 2026, each containing £1m of assets qualifying for APR or BPR. There would be no inheritance tax charge on the transfer into trust, provided the settlor survives seven years, and, going forwards, no 10-year or exit charges would apply (assuming the trust assets remain at a value of no more than £1m). In order to disincentivise this type of planning, the Government is proposing to introduce two “anti-fragmentation” rules.

• Where a settlor transfers APR and/or BPR property into multiple trusts on or after 30 October 2024, there will be a single £1m allowance available, allocated between the trusts in chronological order. (Note, however, that where multiple trusts have been created prior to 30 October 2024, each of those trusts will have a separate £1m allowance.)
   
• Existing rules for valuing “related” property are to be extended so that APR and/or BPR property settled by the same settlor across multiple trusts can be connected for valuation purposes. This aims to ensure that the ownership fragmentation of such assets does not achieve a discount for inheritance tax valuation purposes.

There are various details in respect of both of these proposals which require clarification; however, the Government’s policy intention is clear.

Currently, where various conditions are satisfied, the inheritance tax due in respect of certain categories of qualifying property may be paid in 10 equal yearly instalments. This is a useful way of reducing the short-term cash flow impact of inheritance tax on businesses, and therefore reducing the likelihood of their needing to sell assets. Whilst assets qualifying for APR and/or BPR qualify for instalment relief in many situations, this is not the case in all circumstances, particularly where shares or securities which do not give the transferor control of the company are involved (in which case additional conditions must be satisfied to qualify for the instalment option).

The consultation confirms that the Government intends to expand instalment relief so that it will apply to all assets qualifying for APR or BPR and that such instalments will be interest-free. This is another welcome proposal.

However, in many circumstances, even if the instalment option is available, business owners may face increased effective tax rates due to additional tax charges arising on the extraction of funds to pay an inheritance tax liability. For example, suppose substantially all of the value of a death estate is comprised in a family business (i.e. shares in an unquoted trading company) valued in excess of the £1m cap. The beneficiaries of the estate may have no options for funding the inheritance tax liability on death (at a rate of 20%, i.e. 50% of the usual 40% rate) other than to extract funds from the company. If the extraction of funds was treated for tax purposes as a dividend, the beneficiaries would be liable to additional income tax at up to 39.35%. That would increase the overall tax payable to around 33% - significantly more than the 20% rate that the Government has suggested it wishes to apply.  

It remains to be seen whether representations by professional bodies and advisors will persuade the Government to accept that it would be appropriate to expand the special rules on the extraction of funds from businesses where such funds will be used to pay an inheritance tax liability in respect of APR and/or BPR assets.