Ever since the Chancellor’s bombshell announcement in the 2024 Autumn Budget that business and agricultural property reliefs would be restricted from April 2026, Inheritance Tax (IHT) has rarely been far from the headlines.
Much of the media focus has been on the farmer protests and what has become dubbed the “family farm tax”, – but this may have masked the fact that the changes are far more wide-ranging and will potentially affect every trading business in the country that is worth over £1m.
So, what is changing, and what can those affected do about it?
Business Property Relief – the current position
At the moment, assets that qualify for 100% Business Property Relief (BPR) pass tax-free on death without limit. These assets can include shares in unlisted trading companies as well as assets used in a taxpayer’s sole trade business and some partnership assets.
Although the rules around exactly what assets qualify for BPR can be fairly complex, once the eligibility for BPR has been established, the position is currently quite straightforward – no IHT is due on the value of these assets on death. As IHT is charged at 40%, this is potentially a very valuable relief.
BPR can also apply to lifetime transfers which would otherwise be liable to IHT charge, such as transfers to some trusts.
BPR also applies to assets already held in trust and can reduce or eliminate the 10-year and exit charges that apply for certain trusts.
Proposed changes from 6 April 2026
The Budget proposal, which is not yet legislation, was that for deaths on or after 6 April 2026, the availability of 100% BPR would be restricted to the first £1m of qualifying assets per person. For qualifying assets in excess of that, 50% BPR would apply, giving an effective 20% tax rate on those assets.
Where the taxpayer owns both BPR and APR (Agricultural Property Relief) qualifying assets, the £1m is expected to be apportioned between them.
Importantly, if any of the £1m is unused, it would not transfer to a surviving spouse, in the way that IHT nil rate bands do.
Who will be affected?
This proposal will affect everyone who owns BPR-qualifying assets valued in excess of £1m. The IHT position on death is likely to be quite different to what they had previously expected and so this needs to be planned for.
The changes will also affect anyone looking to transfer BPR-qualifying assets into a trust and also all existing trusts that hold BPR-qualifying assets of more than £1m.
What can be done?
The most important thing to do is to understand whether you, or a trust you have created, are affected by the changes and to what extent.
Once the likely IHT position from 6 April 2026 has been established, the position can then be reviewed to see if the impact of the changes can be mitigated.
Probably the first thing to consider is whether better use could be made of each individual’s £1m on which they still receive 100% BPR. This may involve, say, a levelling up of shareholdings between spouses or bringing other family members into the business, maybe by accelerating existing succession plans. Such changes may impact other taxes, such as Capital Gains Tax, so individual professional advice should always be sought.
Making transfers of BPR qualifying assets into trust pre 6 April 2026 could also be considered. Even if the taxpayer doesn’t survive the transfer by the seven years required to make this fully effective for IHT, the tapering of the IHT rate that applies after 3 years may still bring some benefits.
Trusts can also be used in some circumstances to double up the BPR available between spouses by BPR qualifying assets being left to trust on the first death and then the surviving spouse using non-business property to buy the business assets from the trust, which could qualify again for BPR after they have been owned by the surviving spouse for two years.
In some cases, business owners may decide just to sell the business. Whilst this wouldn’t in itself solve the IHT issues, as BPR would be lost entirely, it would make the assets more liquid and so potentially open up other options.
Even if no actions are taken, it is very important that the likely IHT position after 5 April 2026 is fully understood so that the increased IHT liabilities can be planned for. The IHT due may be more than could be paid out of available cash balances, so plans would need to be made for how this could be funded. Taking out or increasing life insurance may also be an option.
Where a trust is likely to have tax to pay at the next 10 10-year charge, this also needs to be understood and planned for, especially if the trust holds illiquid assets, like company shares.
With now less than a year to go before the proposed changes come into effect, it is important that taxpayers take early advice to understand the potential impacts for them and review their options.
If you want further details on any of these points or want to discuss your position and options, please contact us at BHP.
