In recent months, we have seen significant interest in this topic, with many of our clients concerned about how these changes may affect them.
Tax is complex, and although we have tried to condense the information here, the impact will depend on individual circumstances. If you believe these changes may affect you, please get in touch.
Recent Budget announcements have introduced significant proposed changes to Inheritance Tax (IHT), particularly affecting Agricultural Property Relief (APR) and Business Property Relief (BPR). If implemented, these measures may limit the current 100% relief available on business and agricultural assets transferred on death or as lifetime gifts. This article outlines the key proposals, their potential impact, and recommendations for estate planning.
Background to IHT and current rules
IHT is generally charged at 40% on estates exceeding available nil-rate bands. Each individual benefits from:
- A standard nil-rate band of £325,000
- A residence nil-rate band of £175,000 (subject to tape if the estate exceeds £2m)
Unused reliefs can be transferred to a surviving spouse or civil partner, potentially allowing up to £1m in combined nil-rate bands. Additional IHT reliefs apply to business and agricultural assets:
- Agricultural Property Relief (APR): For farmland and agricultural property used for farming
- Business Property Relief (BPR): For trading businesses and unquoted securities (including Alternative Investment Market (AIM) shares)
- Exempt transfers: Business assets can be transferred tax-free between spouses, civil partners, or charities during a lifetime (subject to the seven-year rule)
Historically, APR and BPR have provided up to 100% relief, eliminating IHT liability on qualifying assets.
The October 2024 Budget introduced significant IHT relief reforms, including:
- A £1m cap on 100% APR
- A combined £1m cap for APR and BPR
- AIM shares to receive only 50% relief (down from 100%)
If enacted from April 2026, these changes could require revisions to wills, lifetime gifting strategies, and succession planning. Draft legislation is yet to be released, and professional bodies are urging reconsideration of these proposals.
Agricultural Property Relief (APR)
From April 2026 100% APR will be limited to the first £1m of qualifying property and values exceeding £1m will only attract 50% relief.
The existing 50% APR category remains for land under a Farm Business Tenancy (FBT). Unused APR allowances cannot be transferred to a surviving spouse or civil partner. This limitation necessitates additional planning, such as shared ownership, gifting, or restructuring estate assets.
Business Property Relief (BPR)
From April 2026 a combined £1m cap applies to both APR and BPR (e.g., £400,000 in 100% APR leaves only £600,000 available for 100% BPR). Business assets above the cap will receive only 50% relief; and AIM shares will only qualify for 50% relief and are excluded from the £1m cap. These changes mean that business owners may need to reassess their succession and estate plans.
Key considerations and potential impact
- Liquidity concerns – many agricultural and business assets have high capital value but low income yield. A reduced relief rate could lead to IHT liabilities requiring careful financial planning.
- Valuations – with new caps, HMRC scrutiny of asset valuations will likely increase, requiring robust documentation and professional appraisals.
- Lifetime Planning and Gifting – earlier transfers of assets may mitigate IHT but require careful structuring to balance control and family considerations. Trusts may be an alternative, despite potential tax charges.
- Complexity – with APR and BPR capped at a combined £1m, estates previously relying on both reliefs will need strategic planning to optimise benefits.
- Nil-rate bands – the standard and residence nil-rate bands remain unchanged, but estates exceeding £2m may lose the residence nil-rate ban, highlighting the importance of coordinated planning.
Pension pots and IHT
From April 2027, unused pension funds will be included in IHT calculations. While beneficiaries will still pay income tax on withdrawals where the deceased was over 75, the estate may also face a 40% IHT charge.
Key implications include: pension administrators reporting fund values to HMRC for IHT purposes; executors factoring pensions into estate administration; and a potential need for early pension planning with financial advisors.
As this is still under consultation, further details are expected before formal enactment.
Given the proposed changes, early estate and succession planning is advisable. Key actions include:
- Property and business valuations: determine exposure to the £1m APR/BPR cap
- Reviewing wills and estate plans: ensuring existing structures remain tax-efficient
- Considering lifetime gifting: reducing IHT liability while balancing control considerations
- Pension planning: factoring pensions into estate strategies
- Exploring financing options: addressing potential liquidity issues to avoid forced asset sales
While these proposals are not yet finalised, they mark a significant shift in the IHT landscape. Cottons will continue to monitor developments and provide updates and will be hosting a series of tax seminars throughout 2025.
Anyone interested in attending the seminars should email enquiries@cottonsgroup.com to register an interest. Event details will be shared via the website and on social media.
For further queries or advice contact Cottons Group at their website here.
Tax Partner
Cottons Group
Personal Tax Director
Cottons Group
