Inheritance tax – Business Property Relief and Agricultural Property Relief allowances

In an unexpected Press Release issued on 23 December 2025, business owners and farmers received a welcome early Christmas present with an announcement of an increase in the tax-free allowance for business property relief (“BPR”) and agricultural property relief (“APR”) from £1m to £2.5m.

The changes in detail

In the October 2024 Budget, there was an announcement that, with effect from 6 April 2026, 100% relief from BPR and APR would be restricted to £1m, with the balance of any assets qualifying for relief being subject to 50% relief from inheritance tax (“IHT”) resulting in an effective rate of IHT of 20% compared to the main rate of IHT of 40% on estates valued at more than £325,000. The changes were designed to raise £520m in additional tax.

In the November 2025 Budget, it was announced that the £1m relief could be transferred between spouses so that it was not a “use it or lose it” relief on the first death.

The 23 December announcement means that a married couple can pass on business and agricultural assets worth up to £5m free from IHT with any balance of qualifying assets above £5m being subject to IHT at 20%. The estates will continue to have the ability to pay any IHT on qualifying assets in annual instalments over a 10 year period.

The increased limit will also apply in the case where a surviving spouse dies on or after 6 April 2026, having inherited the family farm or business before 6 April 2026. In effect, the first spouse to die will be “credited” with a £2.5m tax-free IHT allowance which can be passed on to the surviving spouse who inherits the qualifying assets.

Why have the changes been announced?

The press release refers to the Government having listened to the concerns of the agricultural community and businesses about the reforms of IHT. There appears to be a desire to protect the “family farm” while taxing more valuable agricultural and business assets. Consequently, the lobbying by the National Farmers Union and the sight of tractors driving round Westminster has had an effect. The Government would have found it difficult to limit the increase to farms and not other family-owned businesses, particularly given the diversity of family farms into other business interests which would not have qualified for APR.

The press release does not mention how much tax will be raised by the increase in the limit. The OBR will “crunch the numbers” in time for the Spring Statement. The tax will probably be a lot less than £520m given that the press release states that the number of estates impacted by the removal of the previous 100% relief will fall by one third and that 85% of estates forecast to claim APR and BPR in 2026/27 will now pay no more IHT on their estates.

What next?

There is still a need for the owners of family farms and family-owned businesses to plan for the future and consider the impact of the changes on their estate. If the £5m limit is relevant, the estate will not have the benefit of the residence nil rate band, which is clawed back when estates are worth more than £2m. This means that a further £650,000 will be relieved from IHT for non-qualifying business or agricultural assets and the balance taxed at 40% IHT (based on two IHT nil rate bands of £325,000).

There will be many family-owned businesses that are worth a lot more than £5m. These companies need to consider the impact of an IHT charge on the value above £5m. There will still be tax planning to consider for the owners of these companies, involving a combination of:

• Lifetime transfers of shares to the next generation
• Use of family trusts
• Extraction of cash to create a fund to pay the IHT liability on death, bearing in mind that the cash extraction will be subject to income tax and also be subject to IHT at 40% if held by the owner of the shares who has died
• Life insurance to pay the IHT liability (with the premiums becoming increasingly expensive the older the life being insured)

Conclusions

Although the extension of the IHT free amount to £2.5m is extremely welcome, it does not remove the problem for family-owned businesses worth more than £5m. The owners of these businesses will have to continue to consider their tax planning in order to protect their family business and plan for the 20% IHT charge on businesses worth more than £5m. We may still see the need to sell successful businesses to pay an IHT liability. Owners of businesses worth less than £5m will have to think about any increases in future value and plan for that eventuality – it is quite hard to argue that what is badged as an IHT reform actually encourages business growth and investment.

If you would like to contact someone to talk about your business, please contact Andrew Evans or Debra Martin below.