Introduction
New rules for Agricultural Property Relief (APR) and Business Property Relief (BPR)will take effect from April 2026. These changes may have a material effect on the Inheritance Tax (IHT) liabilities of farming families and business owners. This article outlines the current rules, summarises the upcoming changes, and highlights the potential impact through a simple example.
Current rules
Under the rules in place today, qualifying agricultural or business assets can attract up to 100 per cent inheritance tax relief. This applies where the conditions for APR or BPR are met, meaning that many farms and trading businesses could currently pass between generations without an IHT charge arising. Importantly, there is no upper limit on the value of assets that can qualify for 100% relief.
New rules from April 2026
From April 2026 a £2.5 million limit will apply to the combined use of APR and BPR by each individual. Once a person has used their £2.5 million allowance, any additional qualifying assets will only attract relief at 50% – giving an effective 20% IHT rate. This potentially brings in a tax charge where previously there would not have been one, and those impacted by this change should be thinking about how this liability will be funded.
It was previously announced that the limit would be £1million, and this would not be transferrable between spouses if unused on the first death. The recently announced raising of the limit to £2.5million and now being transferrable was welcome news.
Example
Consider a couple with mirror Wills leaving everything to each other on the first death, and then to children on the second death. They each have a 50% holding in a trading business valued at £6 million. On the first death, assets pass to the surviving spouse, so no inheritance tax is paid and the APR or BPR allowance of the first spouse is not used.
Under the current rules, on the second death the full £6 million would qualify for 100 per cent relief. No inheritance tax would be payable.
Under the new rules from April 2026, BPR would provide a 100% relief on the first £5million – the remaining £1 million would be chargeable to inheritance tax at 20 per cent, giving rise to a £200,000 IHT liability. Although a small percentage of the value of the shareholding, it is a material figure to fund and this can be problematic if there is not sufficient cash within the estate.
Potential planning
Although these changes will reduce the availability of APR and BPR, planning opportunities remain. Lifetime gifting can still be effective, as gifts fall outside the estate if the donor survives seven years. The £2.5million allowance will also refresh after the seven-year period, making early action valuable.
Current Wills should also be reviewed to ensure allowances are used on first death wherever possible. In some cases it may be appropriate for assets to pass directly to the next generation, or into trusts, rather than automatically to the surviving spouse.
Early and well structured planning can help families make the most of the available reliefs and manage future inheritance tax exposure. If you, or your clients, may be impacted by these changes, please let us know – we would be delighted to have a discussion around how we can assist with the planning process.