Could your trust face unexpected inheritance tax charges?

What are discretionary and relevant property trusts?

Discretionary trusts and relevant property trusts are commonly used in estate planning to manage and protect assets for beneficiaries. In a discretionary trust, trustees have the power to decide how and when beneficiaries receive income or capital. Relevant property trusts are a broader category that includes most discretionary trusts and are subject to specific inheritance tax (IHT) rules.

These trusts are often used to safeguard family wealth, provide for future generations, or protect business and agricultural assets. However, they come with tax implications that trustees must carefully manage.

How does inheritance tax apply to trusts?

Discretionary trusts and relevant property trusts are subject to inheritance tax (IHT) whenever capital is paid out of the trust. They are also subject to IHT at ten-year anniversaries from the date the trust was created. Where assets are illiquid this can potentially result in difficulties making payment.

Many trusts will have been set up in the past to protect agricultural or business property. At the time they were created, they will have qualified for agricultural property relief (APR) or business property relief (BPR). Such reliefs are also available to reduce the charge to tax at ten year anniversaries.

Upcoming changes to APR and BPR reliefs for trusts

Whilst relief has historically been unlimited at up to 100%, as a result of the 2024 Autumn Budget, these reliefs will, from 6 April 2026, be capped at the first £2.5m assets for any pre-existing trusts. New trusts may have lower thresholds.

This means that trusts holding business property valued above £2.5m could now face an unexpected future IHT charge. This includes assets such as unquoted trading company shares, including those AIM listed.

In many cases, trustees may have limited means to pay the resulting tax liability, making early planning essential.

Example scenarios for inheritance tax trust planning

The change in the IHT rules comes into force from 6 April 2026. However, for these trusts, their first charge will not occur until the next relevant anniversary date after that.

So, for a trust set up on 1 January 2000, the first relevant charge will occur on 1 January 2030. This does give some time for trustees to consider their options and plan for the IHT liability. However a trust set up on 1 December 1996 will have its first relevant charge on 1 December 2026 leaving relatively little time to make the necessary plans for the charge.

Now, there will be a sliding scale of IHT for trusts affected earlier than others, with charges in the first few years to be likely to be less than 1% of the value of the trust assets. Even a 1% inheritance tax charge on a valuable asset could still be a nasty shock and trustees will need to think about how that will be paid.

Where the charge arises on business property in excess of the £1m relief, the IHT can be paid over ten interest free instalments. But trustees will still need to fund them.

This may require borrowing, a sale of trust assets, or implementing an income strategy such as receiving dividends on limited company shares. None of these options may be appealing nor indeed practical and could come with other tax costs. It is therefore important for trustees to quantify their exposure and start planning now.

Valuations of trust assets will also become more important as the IHT rate is calculated by reference to the value and then charged thereon.

How can we help with trust planning?

We recommend that trustees review and value their trust assets and establish what charge, if any, might be due at the next relevant ten year anniversary. You can then make an informed decision over how to fund the tax liability and / or whether action should be taken before the anniversary date over the future of the trust.

We have trust and IHT experts who can help trustees navigate these once calmer waters to weather the proverbial storm on the horizon.