Prior to every Budget, there is speculation about potential tax changes. A regular prediction in the past has been the abolition of, or restrictions in, inheritance tax (IHT) business property relief (BPR) and agricultural property relief (APR). The speculation about BPR and APR changes was so predictable that it became a ‘boy who cried wolf’ scenario – when the prospect of relief restrictions finally seemed highly likely, for some sceptics (including me!) the response was “here we go again!”
However, it actually happened in Autumn Budget 2024 - the predictions about BPR and APR changes proved to be correct; although not many predicted the nature of the changes, particular those in respect of APR.
Not all the announced changes were gloom and doom. The government confirmed that it would extend the existing scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or relevant approved responsible bodies. However, the good news ended there.
The other changes to BPR and APR apply from 6 April 2026, which at least gives farmers and other business owners some time to assess the implications of the changes based on their personal circumstances.
At present, BPR of up to 100% is available on the value of qualifying business assets, such as unincorporated business interests and unquoted shares in trading companies. However, from 6 April 2026, relief at 100% will be restricted to the first £1 million. This new £1 million threshold applies to the combined value of business and agricultural property; more on this later.
To the extent that the value of business and/or agricultural property exceeds £1 million, a BPR and APR rate of 50% will apply.
In addition, the rate of BPR on shares not listed on the markets of recognised stock exchanges (e.g. shares listed on the alternative investment market (AIM)) will reduce from 100% to 50%. HMRC has estimated for a sample of IHT returns in 2021/22 that around 40% of all estates claiming BPR wholly or partially claimed it on AIM shares, and that around 20% of the value of all qualifying investments for BPR purposes were AIM investments.
In a similar way to BPR, APR is given as a percentage reduction in the value transferred by transfer of values, at rates of 100% (e.g., for property let on a tenancy beginning on or after 1 September 1995), or 50% where the land does not satisfy certain conditions for the higher rate to apply.
The 100% rate and £1 million threshold also apply for APR purposes, albeit that the £1 million threshold is shared between APR and BPR assets. For many farmers, a combination of APR and BPR may be available on their farm businesses.
For example, a farmhouse may be eligible for APR (together with other buildings at the farm used for agricultural purposes), whilst the business carried on by the farmer is eligible for BPR. If the same property is eligible for both APR and BPR in respect of a transfer, APR takes precedence (IHTA 1984, s 114(1)).
Much of the negative post-Budget reaction to the relief restrictions related to the possible effect on farmers, particularly where valuable farmland has been passed down the family over several generations. However, some commentators have observed that the effect of the changes may not be as damaging as initial reactions suggest.
For example, the residence nil rate band remains available for farmhouses occupied as the farmer’s residence. In the case of a married couple with an available nil rate band of £325,000 each and residence nil rate band of £175,000 each, up to £1 million can be transferred free of IHT, with a further £1 million possibly being sheltered from IHT by APR and/or BPR; so up to £2 million sheltered from IHT in total.
Nevertheless, compared to the current regime of APR and BPR with no upper monetary limit, some individuals will be facing an IHT liability on their farming or other businesses for the first time.
As indicated, the new £1 million allowance will apply to the combined value of property in an estate qualifying for 100% BPR and 100% APR.
For example, if agricultural property qualifying for 100% APR is worth £700,000 on a farmer’s death and business property qualifying for 100% BPR is worth £300,000, APR and BPR will be available at the 100% rate on the combined value of £1 million.
HMRC’s Summary of reforms to agricultural property relief and business property relief indicates that if the total value of the qualifying property to which 100% relief applies is more than £1 million, APR and BPR will be applied proportionately across the qualifying property.
For example, if a farming business was worth £4 million on the farmer’s death, comprising agricultural property of £3 million and business property of £1 million, the 100% allowance would be allocated as to £750,000 for the agricultural property and £250,000 to the business property. The remaining agricultural assets (£2.25 million) and business assets (£750,000) will be eligible for 50% APR and BPR, resulting in an overall IHT liability of £600,000 (ie. a marginal IHT rate of 20%).
The APR and BPR changes will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026. For example, if a lifetime gift of unquoted trading company shares made on 31 October 2024 becomes a chargeable transfer due to the donor’s death on 30 April 2026, the new relief restrictions will apply (i.e., 100% BPR relief will apply to the first £1 million, and 50% to the balance) if the recipient owned the shares until the donor’s death.
For trust settlors who have set up more than one trust comprising qualifying business and/or agricultural property before 30 October 2024, each trust would have a £1 million allowance for 100% relief for chargeable events from 6 April 2026. However, the government intends introducing rules to ensure that the allowance is divided where the settlor sets up multiple trusts on or after 30 October 2024.
The government has estimated that almost three-quarters of estates claiming APR and the majority of estates claiming BPR in 2026/27 will be unaffected by the relief reforms.
The BPR and APR restrictions will be subject to a technical consultation in early 2025, so the legislative changes will probably be published in Finance Bill 2026.
For commentary on BPR and APR, see Inheritance Tax at Chapter 13, Tax Planning at Chapter 13, and Agricultural, Business and Heritage Property Relief.
