Proposals to increase values used for IHT charges for certain trusts

Proposals to extend the existing rules for valuing ‘related’ property to multiple trusts set up by the same settlor may have a potentially significant impact on the trust structures of Family Offices and Private Clients.

On 30 October 2024 at Autumn Budget 2024, the Government announced several reforms to the inheritance tax (IHT) reliefs, Business Property Relief (BPR) and Agricultural Property Relief (APR), which can currently provide 100 percent relief from IHT for qualifying assets if the conditions are met.

Chargeable IHT transfers on or after 6 April 2026 will be subject to the new IHT rules – for example for individuals, a lifetime gift into a trust or a death, or for relevant property trusts, 10-year and exit charges. From 6 April 2026, the existing 100 percent rate of BPR and APR will continue to be available for the first £1 million (combined total of BPR and APR assets) of qualifying property. The rate of relief will be reduced to 50 percent for the value of qualifying assets over £1 million. As a result, from April 2026 half the value of property qualifying for BPR and APR will be within the charge to IHT at standard IHT rates. For further information see our article in a previous edition of Tax Matters Digest.

At Autumn Budget 2024, the Government promised a consultation document providing some of the detail regarding the proposed changes, and on 27 February 2025 HMRC published Reforms to Inheritance Tax agricultural property relief and business property relief: application in relation to trusts.

Overall, this technical consultation is primarily concerned with the IHT treatment of relevant property trusts. Its purpose is to seek views on how the upcoming changes to BPR and APR will apply to property settled into trust.

The consultation covers a number of different areas including how the £1 million allowance for 100 percent BPR and APR will operate for individuals and trust charges and transitional rules for transfers made before 6 April 2026 (for example gifts into trust). Of particular significance to Family Offices and Private Clients, and the focus of this article, is the proposal to introduce anti-fragmentation rules which extend the valuation ‘related’ property rules to multiple trusts by the same settlor for relevant property trusts.

The consultation describes: “introducing a ‘related’ property rule for multiple trusts by the same settlor” and specifically includes the comment: “To ensure that the reliefs are applied fairly and consistently, the Government is seeking views on extending the existing rules for valuing ‘related’ property … from 6 April 2026 so that qualifying agricultural or business property settled by the same settlor across multiple trusts can be connected for valuation purposes. If valuing property in the different settlements together gives a higher value than for each individual settlement, then the higher value will be used when calculating 10-year anniversary charges and exit charges.” 

With the reduction of BPR/APR to 50 percent, in order to calculate the amount of the IHT liability due it will be necessary to establish the market value of the qualifying BPR/APR property.

This impacts all BPR and APR assets including shares in trading companies that are not listed on a recognised stock exchange. With unquoted shares being illiquid and the possibility of different sizes and classes of shareholdings and different valuation methodologies, there are many factors to consider in arriving at a valuation. Some of the issues around unquoted shares are the focus of the remainder of this article.

Currently, shares held by different trusts would, for IHT purposes, be valued separately of any holdings of ‘related’ trusts, with any accepted minority discounts applicable based on that specific trust’s holding.

By way of example, if a company with a value of, say, £100 million is owned by two different trusts each with a 50 percent holding, after applying a minority discount for illustrative purposes of, say, 20 percent, each individual holding may have a value of £40 million for IHT purposes.

The proposals in the consultation document introduce a new ‘related’ property rule where one settlor has settled multiple trusts and would change the valuation principles that would be applied to valuing shares held in trust for IHT purposes. As a result, holdings of unquoted shares held across multiple trusts would need to be considered as if they were one combined holding and valued together for IHT purposes if this would result in a higher valuation than under current methods.

Continuing the example above, if both trusts had been set up by the same settlor, for valuation purposes these trust holdings would be combined and valued using the valuation principles of a 100 percent holding, which would give a value of £50 million for each individual trust holding.

The overall impact of the proposed changes is therefore much wider than a reduction of BPR to 50 percent as they also, potentially substantially, increase the underlying value that is within the charge to IHT.

The consultation seeks views on the introduction of an anti-fragmentation rule for trust property settled on or after 30 October 2024. There is the possibility of the future widening of scope of these related property valuation rules.

The consultation period runs until 23 April 2025 after which the Government will publish a response document and carry out a technical consultation for these changes later this year.

Valuation
The proposed anti-fragmentation rules will apply to all BPR/APR assets held in trust (as currently proposed), therefore those impacted should obtain tax and valuation advice.

The valuation of unquoted shares raises a number of questions. There are several different valuation methodologies around how shares are valued, but in many cases the starting point will be to establish the value of the company as a whole and then the trust’s interest in that company, taking into account its share of ownership and any minority discounts that may be appropriate. This is something that may not have been considered before. Valuations are a complex area and there can often be a degree of subjectivity or range in a valuation, so in order to be able to report a valuation that would be acceptable to HMRC, and calculate and pay the amount of IHT due, these questions will require specialist tax valuations input and advice.

It is also important to consider if such valuations could impact other taxes such as stamp duty, capital gains tax and maybe even employment related securities.

Calculating and funding the IHT cost
It will also be necessary to calculate the potential IHT costs and carefully consider funding options for 10-year anniversary and exit charges arising from April 2026.

The consultation document helpfully includes an announcement that the Government intends to ensure that the option to pay IHT by equal annual instalments over 10 years, interest-free, is available to all property which is eligible for BPR or APR. However, once published it will be necessary to carefully review the legislation as it is anticipated that it will be necessary to first be within the payment by instalment rules, before considering if the interest free option can apply. It is also anticipated that any documentation to implement gifts or dispositions from relevant property trusts giving rise to exit charges will need careful consideration.

Those affected will need to ensure that they have full information, confirm the objectives of the trust and seek advice in order to be able to work out the different options they may now wish to consider.

Please speak to the authors or your usual KPMG in the UK contact to discuss these changes and seek advice, including valuation advice.

For further information please contact:

• Daniel Crowther
• Paul Clark