The settlements legislation is designed to ensure that where a settlor retains an interest in settled property, the income arising is treated as the settlor’s income for all tax purposes. A settlor will be treated as having retained an interest where the settlor, or their spouse or civil partner, can benefit from either the income or the underlying property.

In general terms, the settlements legislation may apply where an individual enters into an arrangement which diverts income to another person, resulting in a tax advantage. Such arrangements typically involve an element of “bounty” and are not fully commercial or made at arm’s length.

The legislation is particularly relevant where:

• there is an element of bounty, or
• the arrangement is not on commercial terms, or
• it is not at arm’s length, or
• in the case of a gift between spouses or civil partners, the gift consists wholly or substantially of a right to income.

However, there are a number of everyday scenarios where the settlements legislation will not apply. Following extensive case law in this area, HMRC guidance and judicial decisions indicate that where there is no element of bounty, or where there is an outright gift between spouses or civil partners that is not wholly or substantially a right to income, the legislation will not generally be applied.

The 7-year gift rule is still an available option for those making lifetime gifts, offering a way to potentially reduce Inheritance Tax (IHT) liability. Most gifts made during a person’s lifetime are not immediately subject to tax. These transfers, known as ‘potentially exempt transfers’ (PETs), become fully exempt if the donor survives for more than seven years after making the gift.

If the donor dies within three years of the gift, the transfer is treated for IHT purposes as if it were made on death. A tapered relief applies if death occurs between three and seven years after the gift. 

The effective tax rates on the amount exceeding the nil-rate band are:

• 0–3 years before death: 40%
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%
• 7 or more years: 0% 

Tapered relief cannot reduce tax on lifetime chargeable transfers below the amount initially chargeable, so it does not benefit transfers within the nil-rate band.

It is strongly recommended to keep a record of all PETs, exemptions used, and details of any regular gifts made out of surplus income, ensuring accurate tracking for future IHT planning.

As a general rule, someone who inherits property, money or shares is not liable to pay tax on the inheritance itself. This is because any Inheritance Tax (IHT) due is normally paid out of the deceased’s estate before assets are distributed to beneficiaries. However, the recipient may be liable to Income Tax on any income generated after the inheritance (for example, dividends from shares) and to Capital Gains Tax on any increase in value of the assets from the date of inheritance.

An important exception applies to gifts made during a person’s lifetime. These are known as Potentially Exempt Transfers (PETs). Such gifts become exempt from IHT if the donor survives for more than seven years after making the gift. If the donor dies within three years, the gift is treated as part of the estate on death for IHT purposes.

Taper relief may apply where death occurs between three and seven years after the gift, reducing the amount of IHT payable. In some cases, individuals take out insurance policies, such as seven-year term assurance, to cover any potential IHT liability during this period.

The position is more complex where the donor retains some benefit from the gifted asset. For example, gifting a house but continuing to live in it rent-free is treated as a ‘gift with reservation of benefit’. In such cases, the asset may still be subject to IHT, even if the donor survives for more than seven years. Additionally, IHT may arise if inherited assets are placed into a trust and the trust is unable to meet the tax liability.

The government recently announced significant changes to the planned reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR). The threshold for 100% relief will be increased from £1 million to £2.5 million when the changes take effect from 6 April 2026. The change will be introduced via an amendment to the Finance Bill 2025 with relief reduced to 50% on qualifying assets above the new level.

Spouses or civil partners will be able to pass on up to £5 million of qualifying agricultural and business assets between them free of inheritance tax, in addition to the existing nil rate bands. The transferable allowance will also apply to surviving spouses or civil partners who were widowed before the new policy was announced.

These changes adjust the reforms first announced at Autumn Budget 2024, which had attracted strong criticism from the farming community and rural businesses over the potential impact on small farms and family-owned enterprises. By raising the threshold, the government aims to significantly reduce the number of estates affected by higher inheritance tax charges, ensuring that the reforms are focused primarily on the largest estates.

The government estimates that around 85% of estates claiming APR in 2026–27, including those also claiming BPR, will pay no additional inheritance tax as a result of these changes.

Shares designated as “not listed”, such as those traded on AIM, will attract BPR at a flat rate of 50% (reduced from 100%) from April 2026. This measure was unaffected by the latest announcement.

Agricultural and business property relief changes that were first announced at Autumn Budget 2024 will come into effect from 6 April 2026. These measures will introduce significant reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR), which provide Inheritance Tax (IHT) relief on qualifying business and agricultural assets. These measures have faced significant criticism for their potential impact on small farms and rural communities.

From April 2026, a new £1 million allowance will apply to the combined value of property in an estate qualifying for 100% BPR or 100% APR. This means that the existing 100% rate of IHT relief will only apply to the combined value of property in an estate qualifying for 100% BPR or 100% APR. The rate of IHT relief will be reduced to 50% for the value of any qualifying assets over £1 million. Accordingly, any assets receiving 50% relief will be effectively taxed at 20% IHT (the full rate being 40%).

The government has also confirmed they will reduce the rate of BPR available from 100% to 50% in all circumstances for shares designated as 'not listed' on the markets of recognised stock exchanges, such as AIM. The existing rate of relief will continue at 50% where it is currently this rate and will also not be affected by the new allowance.

The option to pay IHT by equal annual instalments over 10 years interest-free will be extended to all qualifying property which is eligible for APR or BPR.