Restrictions on Agricultural and Business Property Reliefs

Introduction

Labour’s first post-election Budget contained tax rises that will total over £40billion a year by 2029/30. One of the areas to which change was announced is the restriction of Agricultural Property Relief (APR) and Business Property Relief (BPR) in certain circumstances. The APR and BPR restrictions are costed as raising £520million in the 2029/30 tax year. This note provides an overview of the announced changes and points that affected taxpayers may wish to consider.

The announced restrictions for individuals

• A £1million combined allowance will be introduced for 100% relief on APR and BPR assets (collectively ‘relievable assets’). For example, the allowance could be used against £1million of business assets, or £600,000 of business assets and £400,000 of agricultural assets. If there are more than £1million of relievable assets, the £1million allowance will be applied to the assets in proportion to asset values.
• To the extent relievable assets worth more than £1million are subject to Inheritance Tax (IHT), 50% relief will be available. This results in an effective IHT rate of up to 20% on death (compared to the standard 40% rate) and a 10% effective IHT rate on chargeable lifetime transfers, such as most gifts into trust (this compares with a standard 20% IHT rate on chargeable lifetime transfers). 
• Shares listed on the Alternative Investment Market (AIM) or on similar exchanges where shares are designated as 'not listed' on a recognised stock exchange will not qualify for 100% relief. Instead, a 50% relief rate can apply to all AIM shares, regardless of value.
• The APR and BPR restrictions will be introduced to apply to IHT charges that arise on or after 6 April 2026. In addition, the new restrictions will apply to lifetime gifts which are made on or after 30 October 2024 where IHT charges apply due to a death on or after 6 April 2026. Gifts that were made before 30 October 2024 are not within the scope of the changes.
• Changes are also being made to the tax position for trustees. These changes are set out later in this note.

Impact on individuals who own agricultural and/or business property

Individuals who own relievable assets will be considering what the announced changes mean for them. This will depend on what the individual who owns the relievable asset(s) intends to do with the asset, and the value of the asset.

Retaining assets until death after 6 April 2026

Where relievable assets are retained until death, 50% and/or 100% relief will be available on eligible agricultural or business assets. The IHT payable where relievable assets are worth £1million or less would be unchanged, provided the assets owned are not AIM shares. If the assets are AIM shares or the relievable assets are worth more than £1million, the IHT payable will be higher than before the Budget announcements, though will still be lower than would be the case in the absence of reliefs.

Spouses and civil partners

The new £1million allowance will not be transferable between spouses or civil partners. This means that the allowance will be wholly or partly lost if either spouse or civil partner does not have £1million of relievable assets eligible for 100% relief. Spouses and civil partners may wish to consider how assets are held in order to best utilise the allowance. This may involve reviewing existing wills.

Lifetime gifts to other individuals

• If lifetime gifts are made, any gifts made following the Budget on 30 October 2024 will continue to be eligible for uncapped 100% APR and/or BPR if the date on which an IHT charge arises is before 6 April 2026.
• For example, if an individual were to give business assets to another individual on 1 January 2026, no immediate IHT charge would arise as gifts to other individuals are potentially exempt transfers, meaning that no IHT arises provided the donor survives for seven years after making the gift. If the individual who made the gift dies on 31 March 2026, this is before the IHT changes take effect and uncapped 100% APR and/or BPR relief would be available such that no IHT would be payable.
• If instead the individual who made the gift dies on or after 6 April 2026, this is after the new rules come into force and so the restrictions on APR and/or BPR need to be considered:
  • If the gift is of business assets other than AIM-listed shares, up to £1million of value given away will be eligible for 100% IHT relief such that no IHT would be due.
  • If the gifted assets are worth more than £1million, £1million of 100% APR and/or BPR would be available on the gifted business assets, and 50% APR and/or BPR would be available on the additional value given away. For example, if the gifted assets were worth £1.5million, the first £1million would be eligible for 100% relief and so would be tax free. The additional £500,000 would be eligible for 50% APR and/or BPR, so that £250,000 would be subject to up to 40% IHT, giving an IHT liability of £100,000. If other agricultural and business assets are held, the £1million allowance applies (and is shared) across all assets held.
  • If the assets given away are AIM listed shares, the £1million 100% allowance cannot be used. 50% IHT relief will be available on the shares, meaning that an effective IHT rate of up to 20% will apply to the gifted shares.
  • In some cases the IHT payable may be lower due to the availability of other reliefs or exemptions, or if more than three years have elapsed since the gift was made such that IHT tapering relief applies to reduce the tax payable. The nil rate band and residence nil rate band, if available, will also reduce the IHT payable.
• Gifts must be outright if they are to be effective for IHT purposes. If a benefit is retained in a gifted asset, the asset will remain in the individual’s estate. For example, if legal title to a farmhouse is transferred but the individual who made the transfer continues to live in the farmhouse until death, the value of the farmhouse will be in the individual’s estate for IHT purposes.

Lifetime gifts into trust

• The position if relievable assets are given to trustees during lifetime is similar to the tax position if assets are given to individuals, except that immediate IHT charges arise on lifetime gifts into trust unless 100% APR or BPR, or another relief or exemption, is available.
• As in the above section for individuals, any gifts made following the Budget on 30 October 2024 will continue to be eligible for uncapped 100% APR and/or BPR if the date on which an IHT charge arises is before 6 April 2026.
• For example, if an individual gifts relievable assets into trust on 1 January 2026, no immediate IHT charge would arise due to the availability of APR and/or BPR. If the individual who made the gift dies on 31 March 2026, this is before the IHT changes take effect and uncapped 100% APR and/or BPR relief would be available such that no IHT would be payable.
• If within seven years of making a gift into trust the individual who made the gift dies and this is on or after 6 April 2026, this is after the new rules come into force and the asset gifted to trust will still be within the individual’s estate so the restrictions on APR and/or BPR need to be considered:
  • If the gift is of relievable assets other than AIM listed shares, up to £1million of value given away will be eligible for 100% BPR, such that no IHT would be due.
  • If the gifted assets are worth more than £1million, £1million of 100% APR and/or BPR would be available on the gifted relievable assets, and 50% APR and/or BPR would be available on the additional value given away. For example, if the gifted assets were worth £1.5million, the first £1million would be eligible for 100% relief and so would be tax free. The additional £500,000 would be eligible for 50% APR and/or BPR, so that £250,000 would be subject to up to 40% IHT, giving an IHT liability of £100,000 (effective IHT rate of 20%). If other agricultural and/or business assets are held, the £1million allowance applies (and is shared) across all assets held.
  • If the assets settled into trust are AIM listed shares, the £1million 100% allowance cannot be used. 50% IHT relief will be available on the shares, meaning that an effective IHT rate of up to 20% will apply to the gifted shares.
  • In some cases, the IHT payable may be lower due to the availability of other reliefs or exemptions, or if more than three years have elapsed since the gift was made such that IHT tapering relief applies to reduce the tax payable. The nil rate band and residence nil rate band, if available, will also reduce the IHT payable.

• There are three main scenarios for individuals and trustees to consider:

1. Settlements created before Budget Day 30 October 2024:

2. New settlements created on or after Budget Day 30 October 2024 but before 6 April 2026:

3. For gifts into trust on or after 6 April 2026 this is after the new rules come into force:

• • Relievable assets worth up to £1million will be eligible for 100% IHT relief, and assets exceeding this allowance will be subject to an immediate IHT chargeable lifetime transfer charge with 50% relief (i.e. an IHT chargeable lifetime transfer charge of up to 10%).
  • The assets would remain in the individual’s estate for the following seven years and provided they do not die within that period, no further IHT charges will apply to the individual.
  • If the individual does die within the following seven years, the asset will be included in the individual’s estate as noted above, and further IHT charges may arise subject to the availability of other reliefs and/or exemptions.

Selling assets

• If an individual sells assets for market value, there is no loss to the estate and therefore no IHT arises on the sale.
• Post-sale the individual would own other assets, such as cash or shares in a purchasing company, or potentially other assets which are purchased using the sale proceeds. These assets would be within the individual’s estate and IHT would be payable on death or a chargeable lifetime transfer, depending on asset values and any reliefs or exemptions.
• Lifetime gifts could be made out of the assets received in exchange for the original property. These could be potentially exempt transfers to individuals, which would not be subject to IHT provided the donor survives for seven years, or potentially gifts which are eligible for reliefs or exemptions from IHT.

Capital Gains Tax (CGT)

• When assets are given away or sold during lifetime, this is a disposal for CGT purposes and so CGT may arise if the asset given away is standing at a gain. The transfer would be made on a no gain no loss basis if assets are given to a spouse or civil partner (who would essentially pay CGT on the entire gain if he or she made a chargeable disposal of the asset during lifetime at a later date). It may be possible to holdover any gain on the gift of certain business or agricultural assets, which would mean that CGT would be payable at a later date on the gain arising.
• If assets are retained until death, the value of assets is rebased to the market value at the date of death for CGT purposes. Accordingly, no CGT is payable if inherited assets are sold unless the value of the assets increases post-death.
• The interaction of CGT and IHT depending on whether assets are disposed of during lifetime or retained until death will need to be taken into account by individuals who are considering their tax position under the new rules.

Impact on trustees who own agricultural and/or business property

• Trustees can be subject to up to a 6% IHT charge every 10 years. IHT charges may also apply when assets are distributed from a trust. IHT does not currently arise when trust property qualifies for 100% APR or BPR.
• In the Budget, the Chancellor announced that the restrictions on APR and BPR will also apply to trustees with effect from 6 April 2026.
• Trustees will be eligible for the combined £1million 100% relief allowance. When calculating 10-year and exit charges:
  • Trusts that were settled before 30 October 2024 will be eligible for a £1million 100% relief allowance, regardless of how many trusts a settlor has settled assets onto.
  • However, where a settlor sets up multiple trusts on or after 30 October 2024, the government intends to introduce rules to divide the allowance between them.
• 50% relief will apply to the extent relievable assets are worth more than £1million, or to the extent that AIM listed shares are held. We expect that up to an effective 3% IHT rate will apply to assets that qualify for 50% relief (i.e. 50% of the standard 6% rate), subject to the availability of other reliefs and exemptions or the nil rate band.
• The government has announced that it will hold a technical consultation in early 2025 on the detailed application of the changes to IHT charges on trusts.

IHT payments

One of the most significant impacts following the changes for both executors and trustees will be how IHT is paid on agricultural and business assets that are illiquid.

• In some cases, the IHT liability can be paid in instalments over a 10-year period. HMRC will charge interest if IHT payments are made after the due date for making each instalment. The chancellor announced that interest on underpaid tax will be charged at 4% above the Bank of England base rate from 6 April 2025. At the current Bank of England base rate this would be 9% interest on late paid tax.
• Some individuals may choose to insure against the potential IHT liability. Suitable advice on insurance options would need to be taken.
• In some cases, accessing funds to pay IHT may involve extracting income from businesses, potentially by way of dividend or a company buyback of shares. Income tax and/or CGT may apply when funds are accessed (depending on the specific facts involved), which may be viewed as increasing the total tax payable in respect of a transfer.
  • Some businesses may consider setting funds aside to pay an IHT liability in the event of the principal’s death. Careful consideration would need to be given to this, including any potential impact on the availability of BPR depending on the likelihood of HMRC considering that funds so held are not required for business purposes, which could mean that BPR could be restricted. Alternatively, external financing such as debt or insurances may be considered.
  • Early discussions and planning with the board of directors will become even more critical for business owners and their executors.
• Consideration should be given to who will pay IHT. For example, if agricultural or business assets are to be bequeathed to specific individuals, should those individuals pay the tax due on the gifts or will the tax be funded out of the remainder of the estate? It may be appropriate to include clauses about who should pay any tax due in wills. Existing wills may need to be reviewed to consider how the planned changes will affect what the beneficiaries under the will receive.

Wills

We recommend that clients who own business or agricultural assets should urgently revisit their wills to ensure that the changes announced on 30 October 2024 are taken into account.