Since my most recent blog on the proposed changes to business property relief and agricultural property relief for inheritance tax, contained in last Autumn’s budget, the government has now released its draft legislation on the proposed changes.

In this blog, I look at just one aspect of it: the “anti-fragmentation” rules, which might affect anyone hoping to mitigate the new rules by putting their farm or business into a trust or trusts.

“Fragmentation” means breaking an asset into parts, and putting each of those parts into separate ownership.

These rules exist because trusts suffer inheritance tax at up to 6% every ten years, or at any time when assets leave a trust. And (as you probably know from our previous blogs The Autumn Budget’s Changes to Inheritance Tax, Inheritance tax – planning for the April 2026 changes from a corporate view and Inheritance Tax & Business Property Relief: June 2025 update on client concerns) the new rule is that full (100%) relief will, from 6th April 2026, be limited to the first £1million-worth of qualifying business or agricultural assets.

If there were no anti-fragmentation rule, such that each trust had its own £1million threshold, a taxpayer could get around the ten-year charges completely by creating a trust, putting just-under-£1million-worth of assets in it, then the next day creating another trust and putting just-under-£1million-worth of assets in that trust, then repeating the exercise until the whole business or farm was shielded.

The anti-fragmentation rules prevent using multiple trusts in this way, and (in my opinion) do so in a rather harsh way. Each settlor has a £1million threshold which can be inherited by the trusts created by him or her. The allowance is allocated chronologically: for example if you settled £400,000-worth of business or agricultural assets on four consecutive days onto each of four separate trusts (i.e. £1.6million altogether), the first two trusts would each have a £400,000 threshold, the third one would have a £200,000 threshold (i.e. £1million minus the 2x£400,000 already allocated) and the fourth would have no threshold.

One reason this could be harsh is that if, at some later date, (say) the first trust no longer needs its threshold (for example because it sells its business or agricultural assets, and just holds cash – or if the trust ends altogether) then its threshold is completely wasted: it cannot be reallocated to the other trusts, even though they might still benefit from it.

The anti-fragmentation rules have another effect, too, which is that fragmented shares are treated as a single holding for the purposes of valuation. For example, a person with a controlling holding in a company cannot fragment it into several trusts, each of which contains a non-controlling holding, and thereby be taxed on the lower value that non-controlling holdings would have in the market.

On the positive side, another feature of the new rules is that even above the £1million threshold, relief is given at 50% – so, instead of 6%, the effective tax rate of business or agricultural assets in a trust is up to 3% (i.e. 50% of 6%) every ten years. So, even if you do fall foul of anti-fragmentation (or if you just decide not to fragment because of the anti-fragmentation rules) the use of a trust or trusts with a value much bigger than the £1million threshold can still be advantageous.

There is one situation where the new rules are more generous, and this is where trusts are “qualifying pre-commencement settlements” (as defined in section 124G of the draft legislation) in respect of which each trust has a £1million threshold of its own. These are trusts which already existed by 30 October 2024 (i.e. before last autumn’s budget day) and which already contained some agricultural or business assets. The Government’s February 2025 consultation document explained that the intention was that these trusts would continue to each have a £1million threshold, and that this would be true even if further agricultural or business assets are later put into them. This would clearly be an advantageous thing to do now – and ideally before 6th April 2026 – if the agricultural or business property already contained in such trusts is valued at less than £1million, to top-up the threshold to take advantage of the full £1million in each trust.

I do have to stress, though, that this only appears to apply where the trust already contained some agricultural or business property relievable assets before budget day. People with existing so-called “pilot settlements” (for example trusts whose only asset is a £10 note) cannot take advantage of this provision.

The points to take away, at the moment, are:

• the government’s proposals are likely to be effective to discourage fragmentation between multiple trusts as a tax planning strategy;
• all the advantages mentioned in my previous blog still apply, though: so you should head there, next;
• the government do seem to have handed a massive tax-planning opportunity to those who have existing multiple trusts which do contain some assets which qualify for business or agricultural reliefs, where action can be taken before 6th April 2026. I imagine the government think there will not be very many people in that category (and they may be right!) but if you are one of them you should be speaking to us without delay.

I must add that the legislation mentioned above is only in draft form and has not been passed. There may well be significant changes to the law itself, or to our views on the best planning options, as the situation evolves.

If you have any questions regarding trusts, tax planning or any other matters mentioned in this article, please contact Andrew Jones