Looking ahead to 2026 and some of the major tax changes looming in respect of inheritance tax (IHT), Business Property Relief (BPR) and Agricultural Property Relief (APR), there is now greater clarity for business owners and farmers/landowners. This article was published in FT Adviser, and written by our partner Mark Baxter.
There are still a surprising number of people who are yet to have a meaningful discussion with their advisors about how these changes will affect them and their current plans for succession. The first quarter of 2026 will be the key time to make important decisions and implement new plans.
As a reminder, from 6 April 2026, 100% IHT relief will only be available on the first £2,500,000 (the ‘Lifetime Allowance’) of qualifying BPR and/or APR assets per individual, with 50% relief applying to the excess. Initially the government announced a cap of £1,000,000 per person but they announced on 23 December 2025 that this will be increased to £2,500,000 following consultation with affected taxpayers.
There are also specific rules in relation to the Lifetime Allowance for trusts, which depend on when the trust was established, when assets were added to it, the nature of those assets, and other trusts established by the same settlor.
There was some good news in the Budget in that the Chancellor announced legislation will be introduced to ensure that any unused Lifetime Allowance on the death of the first spouse or civil partner can be transferred to the survivor, much like the IHT Nil Rate Band and Residence Nil Rate Band can. If the first spouse or civil partner died or dies before 6 April 2026, the survivor will have a full £2.5 million Lifetime Allowance transferred to them.
In practice this now means that spouses and civil partners should be able to leave up to a combined £5,000,000 of qualifying assets to their chosen recipients, free of IHT. An effective 20% IHT rate will then apply to any excess value on qualifying assets.
In the run up to the Budget, there had been significant speculation around changes to the rules relating to other IHT reliefs and exemptions, such as regular gifts out of income and gifts to spouses or civil partners, but these remained untouched. In addition, the rules relating to Potentially Exempt Transfers and Chargeable Lifetime transfers, remained intact.
So, what does this mean in practice for those who are affected by the changes to APR and/or BPR?
It has always been the case that restrictions can apply to the availability of 100% APR/BPR, and this has not changed. These can have significant and unintended consequences and changes to the business structure, or its activities, or the ownership of assets can result either in relief being denied or restrictions applying.
Therefore, as a starting point, owners of business assets and agricultural assets should review which of their assets currently qualify for 100% APR/BPR.
They will also need to consider the market value of those assets and therefore the impact the Lifetime Allowance will have on their overall IHT exposure. In this regard, it is worth noting that there are specific valuation rules that apply to assets for IHT purposes where spouses and civil partners are concerned.
Consideration will also need to be given to how this liability will be funded, particularly where the estate consists of illiquid assets such as real estate. In this regard, where assets qualify for APR and/or BPR, there is the option to pay the associated IHT liability over a period of up to 10 years in annual, interest-free instalments.
Having established the current position under the new rules thought can then turn to if this can be improved on. Any strategy will need to factor in the specific circumstances of the family including age, health, family relationships and asset ownership. It will also need to build in flexibility due to the long-term nature of such plans. It could include changes to Wills, lifetime gifting and changes to the ownership of assets between spouses and civil partners.
The timing of any changes will also be critical as there may be merit to implementing some of them prior to the APR/BPR changes coming into effect on 6 April 2026.
It is imperative to consider the IHT position of the estate as a whole, rather than simply focusing on those assets which qualify for APR/BPR. For example, trading premises may be owned in a pension fund which will itself be liable to IHT from 6 April 2027 and therefore thought will need to be given to how the IHT liability on will be funded and the impact this may have on the business.
There is much to think about and whilst the rules may change again in the future, waiting and doing nothing leaves much to chance and potentially the loss of valuable reliefs.
If you would like to discuss any of the issues outlined in this article, please get in touch Mark Baxter or your usual contact at Mercer & Hole.
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