MONTHLY FOCUS: BUSINESS AND AGRICULTURAL PROPERTY RELIEF: WHAT DO THE NEW IHT RULES MEAN FOR YOU?

For many years, inheritance tax (IHT) was not necessarily the greatest concern for owners of qualifying businesses and agricultural property. Provided the relevant conditions were met, business property relief (BPR) and agricultural property relief (APR) could provide relief at 100%, without any overall monetary limit.

That position changed on 6 April 2026. There is now a £2.5 million allowance for property that would otherwise qualify for 100% BPR or APR. Once that allowance has been used, qualifying property above it generally receives relief at 50% instead.

This does not mean that every business or farm worth more than £2.5 million will face IHT at 40% on the excess. The continuing 50% relief means that the effective IHT rate on qualifying value above the allowance is normally 20%. Nevertheless, that can produce a substantial liability, particularly where most of the family's wealth is tied up in a business or farm rather than sitting in cash.

The changes mean that succession planning has become considerably more important. Business and farm owners need to think about what their assets are worth, who owns them, who will inherit them and whether lifetime transfers should form part of the succession plan.

 

How does BPR work?

BPR can reduce the value of qualifying business property when calculating IHT.

Relevant business property can include a business or an interest in a business, unquoted company shares and, in certain circumstances, land, buildings and machinery used by a company controlled by the owner or by a partnership of which the owner is a member.

There are detailed qualifying conditions. For example, businesses consisting wholly or mainly of dealing in securities, stocks or shares, dealing in land or buildings, or holding investments are generally excluded. Property will also normally need to have been owned for at least two years, although there are exceptions to this requirement.

The important point for present purposes is that satisfying the conditions for BPR no longer necessarily means that the entire value escapes IHT.

 

And what about APR?

APR performs a similar function for agricultural property. Broadly, it can apply to agricultural land and pasture, together with qualifying farm buildings and certain other land associated with agricultural use. There are ownership and occupation conditions which must be satisfied.

APR applies to the agricultural value of the property rather than necessarily its full market value. This distinction can be particularly important where agricultural land has development potential. In some circumstances, BPR may be available against value that is not covered by APR.

Again, the precise qualifying conditions remain important. But even where property qualifies for 100% APR in principle, the new £2.5 million allowance must now be considered.

 

What changed on 6 April 2026?

Before 6 April 2026, there was no overall monetary cap on the amount of qualifying property that could receive BPR or APR at 100%.

From 6 April 2026, the 100% rate is limited by a £2.5 million allowance. Qualifying value above the available allowance receives relief at 50%. The £2.5 million allowance is fixed until April 2031.

Example

Suppose Bill owns a heating and plumbing company worth £10 million and the shares qualify for BPR. Had Bill died before 6 April 2026, the entire £10 million could have qualified for 100% relief. Suppose instead that Bill dies after the new rules have taken effect. Assuming his £2.5 million allowance is fully available, the calculation in respect of the company is as follows.

	£
Value of company shares	£10,000,000
100% BPR	(£2,500,000)
Remaining qualifying value	£7,500,000
50% BPR	(£3,750,000)
Value subject to IHT	£3,750,000
IHT at 40%	£1,500,000

 

The effective IHT charge on the £10 million business is therefore £1.5 million, or 15% of its total value.

That might sound relatively modest compared with the normal 40% IHT rate. The difficulty is that a £10 million business does not necessarily have £1.5 million sitting in its bank account.

The same problem arises with agricultural property. A farm can be extremely valuable on paper while producing comparatively modest amounts of readily available cash.

That is why the new rules are as much a cash-flow and succession issue as a tax issue.

 

Can the tax be paid by instalments?

There is an important concession for qualifying business and agricultural property.

IHT attributable to property eligible for BPR or APR can be paid in ten equal annual instalments, interest free. This facility is available whether the property qualifies in principle for 100% or 50% relief.

Returning to Bill, his £1.5 million IHT liability could therefore be paid as ten annual instalments of £150,000. That certainly makes the liability easier to manage, but it does not make it disappear. Bill's successors still need to find £150,000 for the first instalment and then the same amount each year thereafter.

Advance planning is therefore essential. A business that is likely to generate an IHT liability should incorporate the expected instalments into its longer-term cash-flow forecasts.

There is another issue if the inherited asset is subsequently sold. The instalment facility can come to an end, causing the outstanding balance to become payable. A partial disposal can similarly accelerate a proportion of the outstanding liability. Simply knowing that the tax can be paid over ten years is therefore not a substitute for planning how it will actually be funded.

 

Why have valuations become so important?

Under the old unlimited 100% relief regime, obtaining a precise valuation was sometimes less critical. If an entire qualifying business was relieved at 100%, whether it was worth £2 million, £3 million or £4 million might not have changed the IHT result. That is no longer the case. A valuation may now determine how much of the £2.5 million allowance has been used and how much value receives only 50% relief. This means owners should not wait until death to think about what their businesses or farms are worth.

Suppose a business is worth £2 million today. There might appear to be no problem because its value is comfortably within the £2.5 million allowance. But if the business grows to £4 million before the owner's death, £1.5 million could fall outside the 100% allowance.

Values should therefore be reviewed periodically, particularly where a business is expanding rapidly, land has development potential or other circumstances are likely to produce significant growth.

 

Are company shares simply valued proportionately?

Not necessarily. Unquoted company shares can be particularly difficult to value. Factors such as the size of the shareholding, the company's assets and earnings, the state of the economy, risks affecting its industry and the market for the shares can all be relevant. There is also an important distinction between the value of an entire company and the value of a particular shareholding in it.

A 25% shareholding in a company worth £1 million will not necessarily be worth £250,000. A minority shareholder has less control than somebody owning the entire company, so an appropriate discount may be required. For IHT purposes, gifts can introduce another complication because the starting point is the loss to the donor's estate, rather than simply the value received by the recipient.

Example

Mike owns all the shares in a company worth £1 million and gives three of his sons 25% each. Each minority holding might be worth only £150,000, so the sons receive shares worth £450,000 between them. Mike, however, is left with a 25% minority interest worth £150,000. His estate has therefore fallen from £1 million to £150,000. For IHT purposes, the reduction in his estate is £850,000, not the £450,000 received by his sons.

That distinction becomes particularly important when determining how much of the £2.5 million allowance has been used.

 

What if you own both business and agricultural property?

There is not a separate £2.5 million allowance for BPR and another £2.5 million allowance for APR. Where qualifying assets exceed the available allowance, it is apportioned between them. For example, suppose Andrew dies owning a £3 million farming business and £1 million of shares qualifying for BPR. His total qualifying property is £4 million. His £2.5 million allowance is apportioned proportionately, giving £1.875 million against the farming business and £625,000 against the shares.

The interaction between the two reliefs therefore needs to be considered across the estate rather than asset by asset.

 

What happens to the value above £2.5 million?

The good news is that qualifying property does not suddenly lose all relief once the allowance is exhausted. Property which would otherwise have qualified for 100% relief instead generally receives 50% relief on the excess.

Example

Simon dies owning qualifying company shares worth £3.5 million. The first £2.5 million can be covered by his 100% allowance. The remaining £1 million receives 50% BPR, leaving £500,000 exposed to IHT. At 40%, the resulting liability is £200,000.

This is why it can be useful to think of the excess as potentially carrying an effective IHT rate of 20%, rather than assuming everything above £2.5 million is taxed at the full 40%.

 

What about married couples and civil partners?

The position is more generous for married couples and civil partners because the unused percentage of the allowance can be transferred following death. This potentially allows a couple to shelter up to £5 million of qualifying property at the 100% rate.

Example

Jude and Richard own a trading business worth £3.5 million. Richard dies and leaves everything to Jude. The transfer between spouses is exempt from IHT, so Richard does not use his BPR allowance. When Jude subsequently dies, her estate can potentially use both her own £2.5 million allowance and Richard's unused allowance.

It is actually the percentage of the unused allowance that transfers rather than a fixed monetary amount. That matters because the allowance is scheduled to increase in line with inflation from 6 April 2031.

There is also a valuable rule where the first spouse or civil partner died before 6 April 2026. The survivor's estate can potentially claim a full additional transferable allowance even though the allowance did not exist when the first spouse died.

For couples who have previously assumed that everything should simply pass to the surviving spouse, however, the new rules create an important planning question.

 

Should everything still pass to the surviving spouse?

Leaving everything to a spouse is attractive because the transfer is normally exempt from IHT and ensures that the survivor remains financially secure. But concentrating all the business or agricultural property in the survivor's estate may not always produce the best long-term result.

Consider what might happen if the survivor subsequently sells the business. The family may have preserved the deceased spouse's unused £2.5 million allowance, but if the survivor no longer owns qualifying property when they die, there may be nothing against which that allowance can be used.

Example

Ian owns a manufacturing business worth £4 million. When he dies, he leaves it to his wife Julie. Julie has never been involved in the business and subsequently accepts an offer from the management team to buy it. She now owns cash rather than BPR-qualifying business property. The transferable allowance may consequently be of little use. Had some or all of the business passed to the next generation on Ian's death, his allowance could instead have been used at that point.

Tax should not dictate the family's commercial or personal decisions, but wills drafted when unlimited BPR and APR were available should now be reviewed.

 

What about future growth?

Growth is another reason why simply postponing succession until the second death may not always be appropriate. If an asset is expected to rise substantially in value, passing it to the next generation earlier can move that future growth outside the surviving spouse's estate.

There may even be circumstances where accepting a relatively small IHT liability on the first death produces a better long-term outcome than preserving the entire allowance for later. Consider farmland worth £3 million. Passing it immediately to the next generation would result in £2.5 million receiving 100% relief and the remaining £500,000 receiving 50% relief, producing an IHT liability of £100,000. Passing it to a spouse could initially avoid that bill. However, if the land subsequently rose substantially in value or was sold before the spouse died, the eventual IHT exposure could be considerably greater.

The important point is that the lowest tax bill today is not necessarily the lowest tax bill for the family overall.

 

Can lifetime gifts help?

Potentially, and this is likely to become a much more important part of succession planning. An outright gift to another individual is normally a potentially exempt transfer for IHT purposes. There is no immediate IHT charge. If the donor survives for at least seven years, the gift generally falls outside their estate. If the donor dies within seven years, however, a gift of qualifying business or agricultural property can use some or all of the £2.5 million allowance. Crucially, the individual's 100% relief allowance can refresh after seven years.

For someone owning qualifying assets significantly in excess of £2.5 million, this creates the possibility of transferring some property during their lifetime, surviving seven years and then having another allowance available for a later transfer or on death. This is a major change in emphasis.

Previously, somebody owning a farm that qualified entirely for 100% APR might have had little IHT incentive to transfer it during their lifetime. Retaining it until death also offered the prospect of an uplift in its capital gains tax (CGT) base cost. The cap means that waiting until death may now expose part of the farm to IHT.

 

Could CGT make lifetime gifting expensive?

It can, which is why IHT should never be considered in isolation. A gift is normally treated as taking place at market value for CGT purposes, even though the recipient has paid nothing. A substantial gain can therefore create an immediate CGT liability. However, qualifying business and agricultural assets can potentially benefit from holdover relief. Where the conditions are satisfied and a claim is made, the gain is deferred rather than taxed immediately. This can make lifetime succession much more practical.

There are still non-tax considerations. Giving away an income-producing asset means giving away the future income from it. Likewise, handing shares to children can mean surrendering voting rights and control over the family company.

The tax saving therefore needs to be balanced against what the owner actually needs financially and how ready the next generation is to take responsibility.

 

Could spreading ownership help?

Yes. The £2.5 million allowance belongs to the individual rather than to the business. Consequently, spreading qualifying property between family members can potentially bring several allowances into play.

Example

Duncan owns a trading company worth £10 million. If he continues to own the entire company until his death, only £2.5 million can fall within his 100% allowance. If appropriate, ownership might instead be spread between Duncan, his spouse and adult children. Subject to the detailed rules, the eventual IHT position could then reflect several individual allowances rather than just Duncan's. But this is not simply a matter of dividing the shares mathematically.

Giving shares away can affect control of the company. Different family members may have different ambitions, financial circumstances or attitudes to risk. Divorce, bankruptcy or a breakdown in family relationships may also need to be considered. And, as explained earlier, minority shareholdings introduce their own valuation complications.

Succession planning therefore needs to combine tax planning with appropriate company and family governance.

 

What if you aren't ready to hand over control?

A trust may sometimes provide an alternative. Trusts can be useful where an owner wants to transfer value for succession purposes but is uncomfortable making an outright gift to the intended beneficiaries. For example, an owner might have young children, wish to protect family wealth from divorce or creditors, or simply want to ensure that the family business remains under appropriate control.

With business assets, the ability to separate beneficial ownership from control can be particularly valuable. An owner transferring shares to a discretionary trust may be able to remain a trustee and continue to exercise control over the trust's shareholding. The tax rules for trusts are considerably more complicated, however.

For trusts established from 30 October 2024, each settlor broadly has a £2.5 million lifetime allowance for 100% relief from trust IHT charges. Unlike an individual's personal allowance, this lifetime trust allowance does not refresh after seven years. Nevertheless, trusts can form part of a wider succession strategy, particularly where outright ownership by the next generation would be commercially or personally undesirable.

 

Does lifetime planning mean giving everything away?

No. The new rules make lifetime succession more relevant, but that does not mean every business owner or farmer should immediately start transferring assets. There are competing considerations.

An owner may need the income generated by the assets. They may need to retain control of the business. Their children may not yet be ready to take over. There may be CGT implications, valuation issues and commercial consequences. The business might subsequently cease to qualify for BPR, or agricultural property might cease to satisfy the APR conditions.

The seven-year rule also means that planning is more effective when started early. For a 50-year-old business owner who expects to retire at 60, there may be considerable scope to plan a gradual succession. For somebody considering the issue for the first time much later in life, the available options may be much more restricted.

The key change is therefore not that everybody needs to give assets away. It is that doing nothing is now itself a planning decision.

 

Do the new rules affect gifts made before 6 April 2026?

They can. The date on which an asset was originally acquired, or even the date on which it was given away, does not necessarily preserve the old unlimited relief.

If someone dies on or after 6 April 2026, the new cap can apply to a lifetime gift that becomes chargeable because the donor dies within seven years. That can create an unexpected liability where a gift was made at a time when the family reasonably expected 100% BPR or APR to cover the whole value.

Example

Nancy retired in April 2024 and gave shares in her family company, then worth £3.5 million, to her daughters. At the time of the gift, the expectation was that if Nancy died within seven years, BPR would protect the shares in full, assuming the daughters retained them and the company continued to qualify.

If Nancy dies after 6 April 2026 but within seven years of the gift, the transfer is brought back into the IHT calculation under the new regime. Only £2.5 million can receive 100% relief. The remaining £1 million receives 50% relief, leaving £500,000 subject to IHT. At 40%, that produces a £200,000 liability.

This is particularly important for families that completed succession planning before the changes were announced or before they took effect. A historic gift should not simply be filed away as finished business. Where the seven-year period is still running, the position should be reviewed to understand how much of the new allowance could be used if the donor died during that period.

The same review should consider whether the recipient still owns qualifying property. Relief on a failed lifetime gift can be lost if the asset no longer qualifies and has not been replaced with other qualifying property. Changes to the business, a sale, or a change in how land is used can therefore alter the position after the original gift was made.

 

Can the £2.5 million allowance be reused?

Yes, but the rules differ depending on whether the transfer is to an individual or to a trust. For lifetime gifts to individuals, the personal 100% relief allowance can effectively refresh after seven years. This creates a potentially valuable planning window for owners with assets worth substantially more than £2.5 million. A gift made now may use some or all of the allowance if the donor dies within seven years. If the donor survives beyond that period, the earlier gift no longer uses the allowance when a later transfer or the death estate is considered.

This means succession can sometimes be staged. An owner with a £6 million business, for example, might transfer part of it to adult children now and, assuming the first transfer falls out of account after seven years, have a renewed allowance available for another transfer or for the assets still owned at death.

That does not make seven-year gifting an automatic answer. The owner needs to be comfortable surrendering the asset, the recipient needs to be suitable, and the CGT and commercial consequences must be considered. But the refresh of the allowance means that time itself has become an important planning resource.

Trusts are different. For trusts created from 30 October 2024, the separate lifetime allowance for 100% relief from trust IHT charges does not renew every seven years. Once that trust allowance has been used, it remains used. That difference is one reason why the choice between an outright gift and a transfer into trust needs careful consideration.

 

What if the business or farm later stops qualifying?

The value of the relief depends on the property continuing to meet the relevant conditions at the time the relief is needed. That is easy to overlook when succession planning is carried out many years in advance.

A family may complete a transfer on the basis that a company is a qualifying trading business, only for its activities to change over time. A growing investment portfolio, surplus cash or a shift towards investment activity can affect whether BPR remains available. Similarly, agricultural land may cease to satisfy the conditions for APR if its use changes.

This is particularly important where a surviving spouse inherits qualifying property. Transferring everything to the spouse can preserve an unused allowance, but the allowance is only useful if qualifying assets are still present when the survivor dies. If the business is sold and the proceeds remain as cash or investments, the family may have preserved an allowance that can no longer be used against those assets.

The same issue arises with lifetime gifts. Where a donor dies within seven years, the availability of relief can depend on what has happened to the gifted property in the meantime. The recipient's plans therefore matter as much as the donor's plans.

Succession planning should consequently include some discussion of what is expected to happen to the business or farm after the transfer. If the next generation intends to sell relatively quickly, the tax consequences can be very different from a plan under which the business will continue for decades.

 

Does your will need to change?

Possibly. The important point is to review it rather than assume that a will written under the old rules is still doing the job intended.

Many wills for business owners and farmers were drafted on the understandable assumption that qualifying assets could pass with 100% relief, while the rest of the estate was organised around the spouse exemption, nil rate band and residence nil rate band. The new cap changes the arithmetic and may also change which beneficiary should receive which asset.

A will leaving all qualifying property to a spouse can still be entirely sensible, particularly where the survivor needs the income or control. But in other cases it may be better to use some of the first spouse's allowance by passing business or agricultural property directly to the next generation. That can remove future growth from the survivor's estate and reduce the risk that the asset is sold before the transferable allowance can be used.

The right answer depends on the value of the assets, the likely future growth, the survivor's financial needs and the family's succession intentions. The key is that the will should now be tested against the new regime rather than simply left untouched because it was appropriate when it was signed.

 

What should business owners and farmers do now?

The starting point should be to establish what you own and what is likely to qualify for BPR or APR. Do not assume that because a business has always been described as a family business it necessarily qualifies in full, or that the entire market value of agricultural land will be covered by APR.

Next, obtain a realistic idea of value. That exercise should include not only what the assets are worth today but also their likely direction of travel. A business currently worth £2 million may present a very different IHT problem if it is expected to double in value over the next decade.

Existing wills should also be reviewed. A will leaving everything to a spouse may still be entirely appropriate, but it should be a conscious choice made after considering the new relief rules rather than simply the continuation of planning undertaken under the old unlimited regime.

Families should then consider succession. Who is expected to own and operate the business in five, ten or 20 years? Is the next generation already involved? Would lifetime gifts be commercially sensible? Does the current owner need the income? Would a trust offer greater flexibility than an outright transfer?

Cash flow should form part of that exercise. Where an IHT liability is likely, estimate its potential size and consider whether the business could fund the annual instalments without damaging its ability to trade. The availability of ten interest-free instalments is valuable, but an unfunded annual liability can still put significant pressure on a business.

Finally, the plan should not be treated as a one-off exercise. Business values change, families change and commercial intentions change. The £2.5 million allowance itself is fixed until April 2031, while the value of a successful business or farm may continue to increase during that period.

The introduction of the cap does not mean that BPR and APR have ceased to be valuable reliefs. Far from it: qualifying value above the allowance can still benefit from 50% relief, and the new rules retain considerable opportunities for sensible succession planning.

What has disappeared is the comfort of assuming that a qualifying family business or farm can simply remain with its present owner indefinitely and pass to the next generation free of IHT.

For owners with substantial qualifying assets, valuation, wills, succession, ownership and cash-flow planning now need to be considered together - and considerably earlier than before.