Labour’s First Budget, IHT-free Investments and 'Are Trusts The Solution'?

Under the current inheritance tax (IHT) regime, our independently recommended IHT-Free Investment Plans provide 100% relief from IHT after 2 years of holding by investing in wide and diversified portfolios of qualifying funds and assets. These plans provide access to capital where required (they are, after all just another form of investment) along with usually providing the investor with a relatively smooth return and investment journey.

As a result of Labour’s first budget, from 6th April 2026, the underlying legislation which allows them to be IHT-free - Business Property Relief (BPR) – will be restricted. A 100% rate of relief will continue to apply for the first £1 million invested in such plans and, thereafter, relief will be at 50%. For the married couple, each spouse gets the £1 million 100% rate of relief, so £2 million in total. But any unused allowance will not be transferrable between them.

And so, this begs the questions – can we help those affected by the new £1m limit by simply transferring some or all of their IHT-free investments into trust? And how does the relief work under those circumstances?

When a transfer is made into a discretionary trust, the value of the transfer eats into the settlor’s £1m allowance on death. In other words, when the person makes the transfer of the IHT free investment into trust, their £1m allowance will be reduced by virtue of the transfer.

Although the trust will get its own £1m allowance, ‘anti-fragmentation’ rules apply, which effectively split the £1m allowance across all of the trusts created by the same person after 30th October 2024. So unfortunately, you can’t just set up multiple trusts, each with their own £1m allowance.

For the transfer itself, the person will have their £1m allowance reduced by any transfers made into discretionary trust, however, it seems likely that they will get their full £1m allowance back after 7 years (however at the time of writing this technical point is still under consultation – we expect to hear back from the Government in the next few weeks).

Another question then comes to mind - what about discretionary trusts established before budget day (30th October 2024)? Do the anti-fragmentation rule apply? It seems not. Each trust should have its own £1m allowance (however again, this point is still under technical consultation).

Attend One Of Our Later Life Financial Planning Under Labour Seminars 

The new IHT rules and other updated financial planning considerations are complex. However, as always there are things you can do. Planning and taking action now could make all the difference.

If you are concerned about how the budget impacts your situation, contact us to book on to our Financial Planning Under Labour seminar. Wednesday 14th May 1.30pm – 2.30pm at Stoke Lodge, Shirehampton Road, Stoke Bishop BS9 1BN. Email marketing@haroldstephens.co.uk or call 0117 3636 212.