Preparing for the Cap on Agricultural and Business Property Relief

Joseph Slane, Senior Associate and Professional Support Lawyer wrote for The Scotsman

Readers will recall that the UK government pledged to make considerable changes to inheritance tax (IHT), particularly agricultural property relief (APR) and business property relief (BPR), in its 2024 Autumn Budget. Over a year and another  Budget since, the details of these changes are close to being finalised in anticipation of the new tax year.

By way of reminder, IHT is charged on the value of an individual’s estate on death (factoring in gifts made within the seven years prior). Every person has a ‘nil-rate band’ (currently £325,000) which is applied against the value of their estate before IHT is charged at 40% on the excess.

Reliefs and exemptions may be available to reduce the value of an individual’s estate for IHT, the most noteworthy of which is the exemption applicable to transfers between spouses and civil partners.  Additionally, where an individual’s estate passes to their surviving spouse or civil partner free of IHT and their ‘nil-rate band’ remains intact, the unused ‘nil-rate band’ can be transferred to the survivor for use on the second death.

Looking back to 2024’s Autumn Budget, the ‘headline grabbing’ IHT policy announcement was that both APR and BPR would be restricted. Despite considerable protest, the policy remains largely intact and is set to come into full effect from 6 April 2026.

APR and BPR are applicable to certain agricultural or business assets which reduce their value for IHT purposes. APR and BPR can apply at 100% in many cases, essentially removing qualifying assets from the scope of IHT.  From 6 April 2026, the extent to which agricultural and business assets may qualify for 100% relief is to be capped. Originally, the cap was set at £1 million. However, following a government announcement on 23 December last year, this is to be increased to £2.5 million. Where qualifying assets exceed the £2.5 million threshold, relief on that excess value will be restricted to 50%.

For example, an individual’s shareholding in a family business valued at £3.5 million would notionally qualify for 100% relief to the extent of £2.5 million. The excess £1 million of value would qualify for 50% relief, leaving £500,000 of value subject to IHT at 40% (£200,000). This is before consideration of any other reliefs, exemptions and ‘nil rate band(s)’.

Every individual will have their own £2.5 million ‘allowance’ to utilise against qualifying agricultural and business assets. Following the original policy announcement, one of the consistently raised criticisms was that an unused ‘allowance’ would not be transferable between spouses and civil partners (in the same way that an individual’s ‘nil rate band’ is as mentioned above). Despite initial resistance, as part of the 2025 Autumn Budget the government backtracked and confirmed that an individual’s unused ‘allowance’ will be transferable. In summary, this means a couple will have a combined ‘allowance’ of up to £5 million to utilise following the second death.

Separate from the £2.5 million ‘allowance’ available to individuals, the government has confirmed that trustees will have their own £2.5 million ‘allowance’ to apply where relevant trust assets are subject to IHT. Multiple trusts settled by the same individual on or after 30 October 2024, will share a proportion of the £2.5m allowance amongst them; however, trusts in existence prior to 30 October 2024 are deemed to have an allowance each.

While the recent changes to the policy are welcome, the late timing of the announcements is frustrating. It is hoped that there will be no more significant changes prior to 6 April 2026, but time will tell. In the meantime, any estate planning should be considered with appropriate advice.