Update on proposed reforms to APR and BPR
Following this year’s Spring Budget, HMRC have now concluded their consultation into the (unpopular) proposed reforms Business Property Relief (BPR) and Agricultural Property Relief (APR), with draft legislation finally being released last month.
Both documents have been highly anticipated by those trying to make plans to minimise the impact of the changes, and whilst it is clear that (in most cases), the responses to the consultation have not had a significant impact on the way the legislation is going to work, we do now have a little more clarity.
So, what do we know now, and how is that going to impact on planning for the future?
Transferability of the £1 million Allowance
Disappointingly, although it was reportedly the most common request made by respondents of the consultation, the £1 million APR or BPR allowance will not be transferrable between spouses or civil partners.
This means that it will be important for families to consider their existing arrangements and to make the necessary changes to ensure that they can still maximise the relief and obtain £2 million between a couple.
In most cases, it will no longer be the best solution to simply leave qualifying assets to the surviving spouse or civil partner on the first death. Instead, drafting Wills to ensure that enough of the value is passed on to the next generation on each death to maximise the relief could provide a better result, potentially up to £200,000 in some cases. This will be especially important when thinking about assets that might pass under survivorship rules (generally assets held as joint tenants) or via a Partnership Agreement (in the case of farmland this way) rather than in accordance with a Will.
In addition, it may be worth considering lifetime gifting to ensure that qualifying assets are spread between a married or civil partnership couple. However, there are risks with doing this which need to be accounted for, and perhaps insured against, for example, the loss of BPR entirely for the first two years in the hands of the recipient which have to be weighed up.
It is therefore important that professional advice is taken sooner rather than which updates the plans already in place.
Transitional Rules for transfers since the Budget (29th October 2024)
Since the announcements, many people have already looked to put planning in place using Trusts or making gifts on to the next generation in an attempt to at least defer the impact of the new rules.
Where that has happened, transitional rules will apply, and these could man that the plans being made now could still result in tax being paid inline with the new rules.
Under the transitional rules which have not been modified as a result of the consultation, trusts settled pre-30th October 2024 will continue to benefit from 100% relief on qualifying assets, but only until the first 10 year anniversary post 5th April 2026. At the time of the anniversary, the relief will be restricted to the first £1 million (per settlor) with the excess being taxed at a rate of 3%. Exits from these existing trusts between now and the next 10-year anniversary will still qualify for full relief and every trust which held qualifying assets before that date will benefit from the full £1 million relief going forward.
Trusts set up between 29th October 2024 and 5th April 2026 still continue to benefit from 100% BPA/APR relief at the point of settlement (so there is no entry charge), but if the settlor passes away after 5th April 2026 and within the first seven years of the settlement, then in calculating the tax due on the transfer as a result of the death, the relief will be restricted in accordance with the new rules, and whether the trust qualifies for the full £1 million at 100% will depend on whether the settlor had already settled any other trusts post 29th October 2024 which used up the relief. The allowance will be applied chronologically, meaning that later trusts may not benefit from any tax free allowance, although the 50% relief on the balance of qualifying assets will still apply. In addition any capital distributions post 6th April 2026 from these newer trusts will need to take into account the restricted relief when calculating an exit charge.
In practice, this could lead to some very complex calculations and almost a two-tier system over the next 10 years so it will be important to take professional advice ahead of setting up any new trust, or taking a distribution.
For lifetime gifts of qualifying assets made post 29th October 2024, where the individual dies within seven years and that happens after 5th April 2026, Gifts made by individuals before the Budget date will still qualify for the old rules even if the dies after 5th April 2026. This will at least be a relief for many who were concerned about the rules being applied retrospectively.
Next Steps
There is still time to take steps towards minimising the impact of the new rules before they are introduced in April, but in the understanding that the way that the transitional rules will apply could still leave families with significant IHT exposure. As well as taking professional tax and legal advice, reviewing your existing insurance arrangements would be sensible to make sure that these are all still fit for purpose.
Should you have any questions or you would like further advice, please contact the Gravita Tax Consultancy Team for more assistance.
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