Insights

Significant changes to Inheritance Tax (IHT) rules for farmers and business owners were announced in the 2024 Budget. Despite widespread criticism, last year’s Autumn Budget confirmed that the new regime of restricted IHT reliefs will be implemented from next April.  In a welcome move, however, it was conceded that allowances will now be transferable between spouses and civil partners.

A further important concession was announced last month. The cap on agricultural and business assets has been increased from just £1 million to the more palatable £2.5 million, meaning that a married couple can now pass on £5 million of agricultural or business assets free from IHT.

Available Reliefs

Agricultural Property Relief (APR) is designed to reduce the IHT paid on transfers of agricultural assets during lifetime or on death. Business Property Relief (BPR) applies to trading businesses, helping to reduce the tax liability when business assets are passed to the next generation. 

APR and BPR are available on certain assets at the rate of 100%. In other cases, 50% relief is available, reducing the IHT rate on these assets to 20%. More detailed information regarding rates can be found in our previous article Inheritance Tax for Farmers – A Changing Landscape. 

In addition to these asset specific reliefs, families can also benefit from:

• The Nil Rate Band (currently set at £325,000)
• The Residence Nil Rate Band for homeowners passing their home on to a child or other descendants (up to £175,000)
• Spouse and civil partner exemption, which fully exempts all assets passing to your spouse or civil partner

Incoming Restrictions

Until the 2024 Budget, there was no cap on APR and BPR.  Any assets which met the definition would be covered, regardless of their value.

From 6 April 2026, the rules for APR and BPR will shift significantly:

• A £2.5 million cap will apply to the total value of agricultural and/or business assets eligible for relief at 100%
• Any assets above the cap will be taxed at 20%
• Assets qualifying for APR or BPR at 50% will not count towards this cap
• Any assets gifted within seven years of death will reduce the £2.5 million allowance

After applying the £2.5 million band coupled with the general IHT exemptions noted above, any non-relieved agricultural and/or business assets will be subject to IHT at an effective rate of 20%. While this is lower than the standard IHT rate of 40%, it is without a doubt a major financial consideration for farming and business owning families.

What’s New?

Under the rules announced in 2024, the 100% relief band was not to be transferable between spouses or civil partners. If the relief was not used on the first death, it was lost, potentially inflating the family’s overall IHT liability by up to £200,000.   

Two significant concessions have now been confirmed by the government:-

1. The cap has increased from £1 million to £2.5 million
2. Any unused element of this £2.5 million band can be transferred between spouses and civil partners on death

This allows up to £5 million of relief on the second death for affected families.

These are very welcome changes as they will protect many families from feeling pressured to pass assets to younger generations prematurely simply to avoid large IHT liabilities. Qualifying assets can now be left to the surviving spouse or civil partner without losing the initial £2.5 million band.

What Should I Do?

Although these concessions are important, the imminent restrictions to IHT reliefs for farmers and business owners are still substantial. It remains crucial that affected families consider appropriate succession planning strategies to protect their farms and businesses. Various options are explored in our previous article Estate Planning for Farmers: Essential Strategies for Protecting your Family Farm.

If you would like to discuss your family’s circumstances and potential mitigation options in more detail, please contact Karen Oliver, Legal Director in our Private Client team here to arrange a convenient time to chat.