Can Business Relief Help Me as a Trustee?

One big issue if you have an existing trust is the 10th anniversary tax charge. The value of the trust will be assessed and the excess over the nil rate band will be taxed at 6%. So, assuming the nil rate band was £325,000, a trust worth £400,000 will pay £4,500 IHT at each tenth anniversary. This is still preferable to the 40% inheritance tax on the whole value that you will have avoided by having a trust for so long, but it is still annoying.

Many people we speak to in this situation either think that they can just pay the trust out before the 10th anniversary, or in some cases have gone past the 10th anniversary and haven’t reported it to HMRC. In the case of the former, they can’t avoid the 10th anniversary charge as they will be caught out by an exit charge which in essence is the 10th anniversary charge of 6% but proportioned for the time the trust has been running (i.e. 8/10ths of the 6% charge if you exit the trust after 8 years).

Prior to the 2024 Autumn Statement from Rachael Reeves the only solution to avoid this tax was to invest the surplus (£75,000 in the above example) into Business Relief qualifying funds before the 8th anniversary. If the trustees had the foresight to invest £75,000 in BR funds before the eighth anniversary, at the tenth anniversary the trust would still be assessed but would only have £325,000 of IHT liable investments and so would pay no tax. The relevance of investing at the eighth anniversary is that it takes two years of ownership before the BR funds become exempt.

However, the Autumn Statement not only brought in a per person limit of £1million in Business Relief funds, it also introduced new rules about how trustees can use these funds. The draft legislation has now been published and it is so unclear as to the effect of the changes, we couldn’t even get the same answer from two Business Relief fund specialists for this blog.

We currently believe that, if you had a trust created before the Autumn Statement Day of 30th October 2024 and it held Business Relief funds already on that day, then the trustees be able to continue using this planning for the 10th anniversary charge. It does seem that it will be limited to the value of the Business Relief fund on that exact date, capped at a maximum of £1million. So, for trustees with an invested trust that is growing in value, next time you go to use this type of tax product you may not have enough ‘allowance’ to fully remove the next 10th anniversary charge.

For new trusts established after that date, it currently looks as though they will need to be set-up by transferring in existing Business Relief qualifying funds. This transferred amount would come out of the donating individuals limit of £1million and only get that allowance back 7 years after the fund are transferred.

For existing trusts that didn’t hold Business Relief funds on 30th October 2024, they can invest their ‘excess’ funds into Business Relief but will only have 50% relief against the 6% tax. This means tax relief of 3% at the 10th anniversary, which divided over the two years they must hold the Business Relief funds for them to qualify, means a measly annual tax gain of 1.5%.

These changes have created a three tier Business Relief situation depending on your position on 30th October 2024.

The best case

You are a trustee of an existing trust that happened to hold Business Relief funds at 30/10/2024 – Congratulations you can have full relief against your future 10-year periodic charges up to £1m or the value of your Business Relief holdings as at 30/10/2024, whichever is lower.

The middle case

You are a settlor that doesn’t have a trust yet but wants one – You can invest in Business Relief, transfer the funds to a new trust after two years and get your Business Relief allowance back after seven years. Longer and more complicated than previously but not terrible. Do be careful if you then consider winding the trust up in future. The legislation as currently written seems to state you would lose the ability to give any future trusts, a Business Relief allowance if you wind the trust up that is first using the allowance.

The worse case

You are the trustee of an existing trust that didn’t hold Business Relief funds at 30/10/2024 – Oh dear, you are unlikely to have a settlor willing to invest in Business Relief and transfer into your trust and you will only get 50% relief against future 10-year periodic charges.

All of this reduces the attraction of Business Relief planning for trustees. This added to the typically lower returns from Business Relief funds over the two-year minimum that trustees need to be invested, mean that it might be better in future just to accept the 6% excess tax for what it is and pay it.

If you have an adviser and a large trust, check whether they are diarising to check the status every 8th and 10th anniversary.

We are currently advising trustees on their tax exposure and investment strategy, from our offices in Hook, Hampshire and throughout the UK using the latest technology.