Unforeseen inheritance tax consequences disrupting business owners and farmers, prompting review of existing wills?
Starting from April 2026, significant changes are set to occur in the UK's Inheritance Tax (IHT) regime. The most notable alteration is the introduction of a £1 million combined cap for Business Property Relief (BPR) and Agricultural Property Relief (APR), which will affect estates exceeding this value [1][2][3].
Under the new rules, only the first £1 million of combined agricultural and business property will continue to receive 100% IHT relief. Any value above this combined £1 million cap will only receive 50% relief, effectively meaning a 20% IHT rate on amounts exceeding the threshold. For instance, an estate holding £600,000 in farming assets and £700,000 in business assets will only receive full relief on £1 million, while the remaining £300,000 will get 50% relief and potentially incur £60,000 in IHT [1].
One area unaffected by these changes is the spousal exemption from IHT on transfers. UK, long-term resident spouses can still pass qualifying assets to each other free of IHT during their lifetime or on death [2][3]. However, unlike the nil rate band (NRB) and residence nil rate band (RNRB), the £1 million BPR/APR allowance cannot be transferred to a surviving spouse. This means when the surviving spouse passes assets to children, only one £1 million combined allowance applies rather than a doubled £2 million allowance [2][3].
In trusts, similar rules apply with a 20% entry charge on property qualifying for these reliefs valued over £1 million, and ongoing IHT charges payable by trustees. New anti-fragmentation rules aim to prevent splitting assets to maximize relief [5].
Some business owners have started to put in place new measures to avoid IHT or reduce their IHT bill. One such measure is making a lifetime transfer of business assets to a spouse free of IHT [6]. Another measure is setting up a trust for the surviving spouse with a life interest in the business assets to ensure the ultimate beneficial recipients of the assets [7].
It is essential for families to check that this is a tax-efficient option and to ensure their wills are up to date. The changes may potentially penalize those who are not aware of the new rules [8]. The daughter of one business owner has expressed fear due to the inheritance tax changes affecting their family business [9].
The £1 million allowance will be uprated in line with inflation from April 2030 onwards [10]. The changes do not align with the current rules for the IHT nil rate band (NRB) and residence nil rate band (RNRB) [11].
In summary, the £1 million combined BPR and APR relief cap applies per individual, reducing full relief on estates exceeding this value. Spouses cannot transfer the unused £1 million BPR/APR allowance to each other, unlike the NRB or RNRB. The spousal exemption from IHT on transfers remains unaffected. These changes increase potential IHT liabilities in larger estates with significant business and agricultural assets [1][2][3][5].
[1] https://www.gov.uk/government/publications/business-property-relief-and-agricultural-property-relief-legislation/business-property-relief-and-agricultural-property-relief-legislation [2] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief [3] https://www.gov.uk/government/publications/inheritance-tax-business-property-relief-and-agricultural-property-relief-legislation/business-property-relief-and-agricultural-property-relief-legislation [4] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief [5] https://www.gov.uk/government/publications/business-property-relief-and-agricultural-property-relief-legislation/business-property-relief-and-agricultural-property-relief-legislation [6] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief [7] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief [8] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief [9] https://www.telegraph.co.uk/news/2021/03/23/farmers-fear-inheritance-tax-changes-will-force-them-sell-land/ [10] https://www.gov.uk/government/publications/business-property-relief-and-agricultural-property-relief-legislation/business-property-relief-and-agricultural-property-relief-legislation [11] https://www.gov.uk/guidance/inheritance-tax-business-property-relief-and-agricultural-property-relief
- Wealth management services may prove valuable for UK business owners seeking to minimize their Inheritance Tax (IHT) liabilities, as they can offer advice on strategies such as transferring business assets to a spouse free of IHT or setting up trusts for surviving spouses.
- If you have substantial agricultural or business assets, it's crucial to review your personal finance situation and possibly consult with a financial advisor to understand the impact of the new IHT rules on your estate and consider potential solutions to reduce your potential IHT bill.
- In light of these IHT changes, it's essential to work with a professional wealth manager to develop a strategy for managing your wealth and ensuring a smooth transfer of assets to your heirs, minimizing IHT expenses and maximizing wealth preservation for future generations.
