People with assets that qualify for business property relief (BPR) or agricultural property relief (APR) can often save significant amounts of inheritance tax with appropriately structured wills.
BPR and APR offer valuable inheritance tax relief for qualifying assets. In some cases, only one of the reliefs applies; in others, both may be available. What is less widely known is that the structure of your will can have a major impact on the total relief available and the inheritance tax due on your death.
What is business property relief?
Business property relief applies to “relevant business property” and can, depending on the circumstances, reduce its inheritance tax value by up to 100%. The criteria are complex, so professional advice is essential to determine eligibility and to structure your interests to maximise the relief.
What is agricultural property relief?
Agricultural property relief applies to “agricultural property”. Like BPR, it can reduce the inheritance tax value by up to 100%, but the conditions for relief are different. Again, professional advice is strongly recommended.
Clients with qualifying assets, such as a business or a farm, should also consider the risk that these reliefs may be withdrawn or limited in future due to legal changes or a change in personal circumstances. The current regime is relatively generous by historical standards, but this may not always be the case.
Using Discretionary Will Trust to maximise reliefs
An appropriately structured will can help preserve available reliefs and create opportunities to maximise them. For example, clients with relievable assets can protect those assets by placing them into a discretionary will trust.
This approach is often especially beneficial for married couples. Assets left to a UK-domiciled spouse are already exempt from inheritance tax due to the spouse exemption. However, this also means that any additional reliefs (like BPR or APR) are effectively wasted if those assets are left outright to the spouse. Using a discretionary trust can avoid this issue and also enable further inheritance tax planning.
A discretionary will trust allows trustees to decide how and when to distribute assets to a class of beneficiaries, which may include the surviving spouse. The spouse can also act as a trustee and may still benefit from the trust at the discretion of the trustees. Because the assets are held within the trust rather than the spouse’s estate, they do not form part of their taxable estate. While trusts can be subject to inheritance tax charges (typically lower than personal estate charges), the overall tax savings can be substantial.
Preserving reliefs
Using a discretionary will trust on the first death can preserve valuable reliefs that might otherwise be lost if circumstances change before the second death – for example, if assets are sold or if the relief rules are altered.
Example 1: No trust – relief lost
Margery and Jake own a successful furniture business equally. When Margery dies in 2012, she leaves her £1 million shareholding (qualifying for 100% BPR) to Jake. Jake later sells the business. At his death in 2021, the proceeds (now worth £1.5 million) are held in an investment portfolio, with no BPR available. His estate is subject to inheritance tax of £600,000 on these assets.
Example 2: Discretionary trust – relief preserved
Margery instead leaves her business shares to a discretionary trust, naming Jake and their sons Ben and Nigel as trustees. After Jake’s death, the trust assets (now an investment portfolio) are distributed to Ben and Nigel and their children. There is no inheritance tax on Jake’s death in relation to the portfolio, and while the trust may incur a smaller charge, a significant tax saving is achieved.
Maximising relief on the family home
The residence nil rate band (RNRB) is an additional inheritance tax relief when the home is passed to direct descendants. However, it begins to taper when an estate exceeds £2 million—including assets qualifying for BPR or APR.
A well-drafted will using a trust can reduce or eliminate this taper.
Example 3: No trust – RNRB lost
Richard owns a business (worth £2 million, qualifying for BPR) and other assets worth £800,000. Clare, his wife, has assets worth £400,000. They own a £600,000 home jointly. Richard leaves everything to Clare in 2016. When Clare dies in 2021, her estate exceeds £2 million, so no RNRB is available.
Example 4: Discretionary trust – RNRB preserved
If Richard had left the business shares to a discretionary trust and the rest to Clare, her estate on death would be worth £1.5 million (assuming £300,000 growth). This is below the taper threshold, so RNRB and transferable RNRB from Richard would apply—saving £140,000 in tax.
Planning opportunities after the first death
The right will structure can also allow further planning opportunities after the first death.
Example 5: No trust – Relief not reused
Paul and Jenny, in a farming partnership with their daughter Gill, have a joint estate of £7 million—£4 million of which qualifies for BPR and APR. Paul dies in 2015, leaving everything to Jenny. She later leaves the farm to Gill and other assets to Karen. The inheritance tax on Jenny’s death is £940,000.
Example 6: Trust structure – Relief reused
If Paul had left the relievable assets to a discretionary trust and the rest to a life interest trust for Jenny, the trustees could have transferred £1 million in relievable assets from the life interest trust to the discretionary trust shortly after his death.
Provided Jenny survives this transfer by two years, the reliefs apply again on her death, reducing her estate’s liability to £540,000—a saving of £400,000.
Complex tax and legal issues
Trusts are subject to potential inheritance tax charges at ten-year intervals and on termination. Some transactions may also trigger capital gains tax and stamp duty, which must be weighed against the potential tax savings. Income tax implications may also arise.
Moreover, using a discretionary trust requires confidence in your chosen trustees, as they control how and when assets are distributed. You must be comfortable with not leaving assets outright to beneficiaries.
This is a complex area of law, and expert advice is essential. However, with the right planning, significant tax savings can be achieved.
