Use Agricultural and Business Property Relief 2026 with a Discretionary Trust

Our wealth is under attack by the current government to raise taxation ever higher.  Inheritance tax (IHT) liabilities are getting larger and larger.

• Frozen inheritance tax nil rate band at £325,000 per person.
• Frozen inheritance tax residence nil rate band at £175,000 per person.
• Unused pension funds to be included in the estate for inheritance tax from April 2027.
• Agricultural Property Relief and Business Property Relief to be combined from April 2026, with a cap of £1m IHT free (currently unlimited) and any excess subject to inheritance tax at 40% but discounted for now by half to just 20% tax.

Many people have already started to plan for unused pensions being included in the estate and the farmer protests across the country are well publicised given the huge IHT liabilities they may now face when all they are trying to do is pass their farms on to children to continue the ‘family business’  Many farmers and business owners being worried that land or business assets will have to be sold each time a generation passes to pay IHT bills.

New Inheritance Tax Limits for Combined Agricultural and Business Property Relief April 2026

• Agricultural Property Relief and Business Property Relief will be combined with one cap.
• First £1m is 100% relieved from IHT. 
• Excess over £1m is subject to IHT at 40% but for the time being there is a 50%, so any excess over the relief cap will be subject to 20% IHT.

Allowed Agricultural Property as per HMRC

• Land used to grow crops or rear animals.
• Stud farms.
• Trees, forestry land that is harvested at least every 10 years.
• Mil quota values.
• Farm buildings (not derelict).
• Farm cottages and farmhouses that are lived in by people that ‘work the land’ daily.
• Agricultural assets must have been held for two years.

Not Allowed:

• Land under crop rotation, farm equipment and machinery, derelict buildings, harvested crops and livestock.

Allowed Business Property as per HMRC

• The business or interests in a business.
• Unquoted shares (not listed on a stock exchange) in a trading business.
• Quoted shares listed on AIM only (smaller companies with less regulation) but relief is limited to 50% of value.
• Business assets must have been held for two years.

Not Allowed:

• Public listed company (Plc) shares on a recognised stock exchange.

Consider Using Discretionary Trust within Your Will

• A discretionary trust is not a personally owned trust or a personal asset.   
• Assets and income held inside a discretionary trust are available for distribution by the trustees to any qualifying beneficiary e.g.  “the beneficiaries are defined as my hereditary heirs and their subsequent bloodline heirs”  - think of this as naming the whole British Lions Rugby Squad but only some and not all of them will be on the field and playing at any one time or even “my beneficiaries are all members of the “MacHaggis Clan”.
• Trustees can distribute assets to anyone in the squad or in the clan at anytime they choose i.e., at their discretion, although you will have usually set out the rules of the trust in your Will for what/when/where/who trustees can distribute trust funds.
• £1m of agricultural or business assets are passed in the Will to a discretionary trust (IHT free Agricultural and Business Property Relief) using meaning these assets are now outside the estate for future generations plus you still have your usual nil rate band allowances of £325,000 and residence nil rate band £175,000, total £500,000 each or £1m for a married couple/civil partnership.
• If you have not done this, then £1m of assets will still be in the next generation’s estate for future IHT and so on.
• By using a discretionary trust for these assets, you have also:
• Protected this wealth from future IHT.
• Protected this wealth from future reduced allowances.
• Protected this wealth from the withdrawal or reduction of 50% in IHT on assets in excess of £1m.

Downside of Discretionary Trusts

• 6% annual charge to tax every 10 years but if this is for 10 years only, 20 years or even 30 years, that is a charge of 6%, and approximately compounded 12% and compounded 18% respectively when compared to 40% or 20% IHT.
• Capital gains tax for Discretionary Trusts: CGT free annual allowance is just £1,500 pa when selling assets (as compared to £3,000 for individuals) but many business owners and farmers may not be planning to sell their business anyway.
• Income tax for Discretionary Trusts: Is charged at 45% and dividends are taxed at 39.35% but:
• When a trustee distributes income to a beneficiary, they issue a 45% tax paid certificate meaning that a 0% taxpayer can reclaim 45% tax, a 20% basic rate tax payer can reclaim 25%, a 40% higher rate taxpayer can reclaim 5% and a 45% additional rate taxpayer has no further tax to pay.

Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.

See: Later Life & Inheritance Tax Review

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