Now that 5 April has passed, it seems unlikely that the government will reverse its decision to change the existing Inheritance Tax (IHT) regime for agricultural and business property.
Below, we have summarised the main headline changes…
Agricultural Property Relief (APR) & Business Property Relief (BPR)
Up to 5 April 2026, uncapped relief applies to agricultural property and certain businesses/interests in businesses at a rate of either 100% or 50%.
From 6 April 2026, the new rules are as follows…
Relief at the rate of 100% will only be available for the first £1 million of combined agricultural and business property.
This £1 million allowance will not apply to AIM shares, for which the maximum rate of relief will be 50% from 6 April 2026.
If the total value of an individual’s relievable property exceeds £1 million, the allowance will be applied proportionately across the qualifying property. For example, if you own £3 million of agricultural property and £2 million of business property, the allowance will be split £600,000 for the agricultural property and £400,000 for the business property.
Once the £1 million allowance is exceeded, the maximum rate of relief will be 50%. The effective rate of tax will be 20% on APR/BPR qualifying property, in excess of the £1 million allowance at the current rate of IHT of 40%.
Any unused part of the £1 million allowance will not be transferable between spouses.
The £1 million allowance will apply after April 2026 to:
- Property in a person’s estate on death (it’s unclear whether this will include trust assets, deemed to be in an individual’s estate for IHT purposes).
- Gifts made to individuals on or after 30 October 2024 and in the 7 years before death, if the death occurs on or after 6 April 2026.
- If an individual gifts APR or BPR qualifying assets and dies within 7 years of making the gift, the value of the gift will use some (or all) of their £1 million allowance that would otherwise be available on their death.
- Every individual’s allowance ‘renews’ every 7 years.
- ‘Lifetime chargeable transfers,’ e.g. gifts into trust from 30 October 2024 or 6 April 2026.
Pensions
As of 6 April 2027, most unvested pension funds and pension death benefits will form part of the estate and will be liable to IHT charges.
Up to 5 April 2027 unvested pension funds and death benefits were exempt from IHT. This is a major change; its aim is to prevent pensions from being used as a tool for avoiding IHT, which the Treasury currently believes is the case.
The changes will mean that if the deceased dies on or after their 75th birthday, withdrawals from the inherited pension fund by beneficiaries will be subject to Income Tax at a beneficiary’s marginal rate. This would mean that after the IHT deduction, a 45% income taxpayer would be subject to an overall effective tax rate of 67%.
Where IHT is payable, it’s paid by the pension fund to prevent withdrawals being required (and possibly taxed) to pay IHT.
Should I consider making changes to an existing will & how will this affect me?
In the situation of married couples/civil partnerships, the usual tax planning on the first death is that the survivor receives the estate of the deceased spouse free of IHT either outright or in trust (IPDI) for life, and for the estate to pass to lineal descendants on the second death.
Following the changes, there are several pitfalls to be aware of. One of the largest potential ‘tax traps’ is that if the APR/BPR £1 million allowance is not used on the death of the first spouse, then the relief is lost.
For example, in a press release the government claimed that farming families will be able to pass up to £3 million tax free to their children, where the farm is owned by a married couple.
Please note, the £3 million applies where £1.5 million passes direct to lineal descendants on the first death and not to the surviving spouse (£1 million of APR/BPR, £325,000 of Nil Rate Band (NRB) and £175,000 of Residential Nil Rate Band (RNRB)).
The allowance is halved to £1.5 million for an individual who has lineal descendants. The RNRB starts to taper to zero where an estate exceeds £2 million.
Need some guidance?
Given the potentially significant impact that changes will have, should you wish to discuss your situation, then please let us know and we will arrange a meeting or conversation with you.
