Changes to inheritance tax - frequently asked questions

The information provided below is correct at the time of writing, but no legislation has yet been published, and the CLA is still lobbying to change the policy. Details will be updated regularly.

The announcements in the 2024 Autumn Budget could create significant and lasting challenges for rural businesses of all sizes. Under the Chancellor’s proposed changes, from April 2026, inheritance tax (IHT) reliefs available to farms and family businesses will be restricted.

For an introduction to the basics of succession planning and inheritance tax, please see the two part succession planning webinar series here. More in-depth materials can also be found in the CLA Handbook on Succession Planning (CLA94).

The FAQs below aim to provide some straightforward guidance and clarity to members using some worked examples. The questions and corresponding answers include:

• What has the government announced in relation to IHT reliefs?
• There's confusion over the number of farms that will be affected. How is the 70,000 farms figure calculated?
• I heard on the radio that the allowance is actually £3 million, and not £1 million. Is this true?
• Can I use insurance to mitigate the IHT liability?
• Can I reduce my IHT liability by making gifts?
• Can I make last-minute (so-called ‘deathbed’) gifts to increase my IHT allowances?
• Does transferring assets to a company remove them from my taxable estate?
• Can I take out a mortgage on my property to reduce the value of my taxable estate for IHT purposes?
• Would my executor have to pay CGT when assets are sold to fund the IHT bill?
• Can the IHT bill be paid by instalments and will interest need to be paid?

It is important you check with the CLA tax team or your professional advisers before taking any actions.

From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will be capped at £1m in total. Qualifying assets beyond this level will receive 50% relief from inheritance tax, before utilising the nil rate band (NRB) of £325,000 and residence nil rate bands (RNRB) of £175,000.

Each individual has their basic IHT allowance, known as the nil rate band (NRB), which effectively is the portion of the estate taxed at 0%.  A RNRB may also be available in addition to the NRB, provided that the individual leaves their main home to their direct descendant (i.e. children or grandchildren) and that the overall estate is below £2 million before IHT reliefs are taken into account.  Once the estate exceeds this threshold, the RNRB will be tapered away by £1 for every £2 it exceeds the limit. For help to understand how the RNRB works, visit here.

Any unused NRB and RNRB may be transferred to a surviving spouse or civil partner. Any part of the estate that exceeds the NRB and RNRB will be taxed at 40%. Other IHT exemptions (e.g. spousal exemption) and reliefs (e.g. woodland relief) are unaffected.

To illustrate this, consider the case of Mr D., a divorced individual owning a £1.95m small arable farm, which he manages with his son. He lives in the farmhouse, valued at £450,000 on the open market (£300,000 agricultural value). Mr D. intends to leave the farm to his son.

APR is given to the agricultural value of the asset and BPR is not available to the farmhouse. Consequently, the non-agricultural value of the farmhouse is subject to IHT, just like any other assets.

Note: the non-agricultural value of the farmhouse (£150,000) does not qualify for IHT reliefs and therefore is subject to IHT.

This data is based on the number of size bands. According to Defra figures there are 30,000 farms in the UK that are over 50ha and 40,000 over 100ha.

If we take the average value of land as £9,250 per acre, which is sourced from Knight Franks Farmland Index of March 2024, every farm above 50ha has land that is worth more than £1m. This is where combined APR and BPR are nominally capped.

If you consider the other allowances, such as nil rate bands and residence nil rate band, it takes the allowance up to £1.5m. For some couples this could be £3m.

However, if you were then to include the value of the farmhouse, equipment, machinery and other assets, a farm over 50ha is likely to be worth over £2m. Farms over 100ha will definitely be worth over £2m.

It is important to note that the disparity comes about as we are looking at the impact on farms over a generation, whereas the government’s figure is only looking at a single year. We are not - claiming that 70,000 farms will shut down or have to pay the tax a year.

This cap will however lead to transformational change in the industry over time.

Even at the lowest estimate, Steve Reed is saying 500 farms a year will be affected by this change. This will still be over 20,000 farms impacted by the caps over a generation (40 years.)

This suggestion of £3 million involves fully utilising all the NRB of £325,000, RNRB of £175,000 and the £1 million IHT reliefs cap at each of the couple’s death, which may not be possible or practical in certain cases. Getting the full £3 million allowance will often involve restructuring of the business, reorganising property ownership and updating wills.

Here is an illustration.

Mr S. farms the 300 acres that he owns as a sole trader. The farm is valued at £4.2 million. While Mrs S. assists with administrative tasks, she is not formally involved in the business. Under their wills, each spouse will inherit the other’s assets, and the farm will only be passed to their children upon the second death. If Mr S. takes no further action, the IHT liability under the new rules will be calculated as follows:

On the first death, there is no IHT due as gifts to spouse are exempt from IHT. This means the NRB and RNRB have not been used on the first death and are available to be used on second death. The position on the second death is as follows:

Note: RNRB is tapered by £1 for every £2 when the value of the estate is over £2 million before IHT reliefs are considered. This happens on the second death in this example, and the full RNRBs (including the transferred RNRB from the first death) has been tapered away.

However, the position will be different if Mr and Mrs S. decide to farm in partnership with the farm jointly owned between the two of them. If they also update their wills and leave their respective half share of the farm directly to their children, the position will be as follows:

Note: RNRB is tapered by £1 for every £2 when the estate is over £2 million before IHT reliefs are taken into account. At each of the deaths, the estate exceeds the threshold by £100,000 and so RNRB is reduced by £50,000 to £125,000.

Guidance from the government is currently limited and the above examples are intended merely to illustrate ways to optimise available allowances. While you may wish to start considering possible business restructuring and assets reallocation, there is no one size fits all approach. In particular you will need to bear in mind that the draft legislation has yet to be published; it would therefore be prudent to consult the CLA tax team or your professional advisers before taking any actions.

Using life insurance can be an effective way to help cover potential IHT liabilities, but the cost effectiveness would depend on your age and health factors. It is not necessarily the most suitable option for everyone. Whole of life insurance ensures that your heirs are not forced to sell assets or dip into other funds to pay the IHT, as it provides a payout that can be used to cover the tax liability. This is especially useful as the IHT bill is normally due within six months of death, unless you opt to pay IHT by instalment (see below).

The policy should be written in trust, so that the payout goes directly to your chosen beneficiaries and sits outside of your estate for IHT purposes. This avoids adding to the estate's value and ensures the funds are accessible without needing probate, meaning beneficiaries can receive them faster to settle any tax due. Your insurer should be able to help you with this aspect.

One final consideration is to set an appropriate coverage amount. You may want to consider the estimated value of your estate and the likely IHT liability. Using the above example of Mr D., the coverage should be around £20,000. Many people choose coverage matching the expected IHT bill, but some also add a buffer in case of future increases in their estate value. Some insurers also offer index-linked policy to protect the payout from inflation.

If you would like to explore this option further, please contact our partner at LIFT-Financial.

There are three types of lifetime gifts for IHT purposes, which are (i) exempt gifts; ii) potential exempt transfers (PETs); and (iii) chargeable lifetime transfers (this normally relates to transfers into a discretionary trust – and is outside the scope of this FAQs).

Certain gifts are exempt from IHT without needing to be on the “7-year clock” (i.e. the gift is not brought back into the IHT calculation if you pass away within the 7-year period after the gift.  Please see PET rules below for further details). This includes for example, gifts made between married couples or civil partners (unless the recipient spouse is not a long-term UK resident); gifts made to charities; gifts within the annual exempt limit of £3,000; or regular gifts made out of surplus income.

To qualify as a regular gift made out of surplus income, the gift must meet the following conditions as set out under section 21 of the Inheritance Tax Act 1984 (IHTA 1984)):

1. form part of your normal expenditure; and
2. made from your surplus income (i.e. not capital); and
3. does not affect your standard of living.

If you are relying on this strategy, we would recommend that the last page of the IHT Form 403 be prepared by the donor in advance.  This helps to provide evidence of gifts meeting the above conditions and support claim for gift relief.

In general terms, a gift by one individual to another is exempt from IHT, but only if the person making the gift (the donor) continues to live for seven years after the date of the gift. This type of gift is therefore ‘potentially exempt.’ There is no IHT to pay when the gift is made, and it does not need to be reported to HMRC at that time.

If the donor passes away within seven years of making a gift, the value of that gift will be included in the deceased donor’s IHT calculation. This ‘failed’ PET will be assessed first, using any available NRB. Any portion of the gift exceeding the NRB will be taxed along with the estate.

APR and BPR could be available to protect against the failed PET, if the relevant conditions for obtaining the reliefs were fulfilled at both the date of the gift and the date of the subsequent death. So, it is important that the relevant assets continue to be used for agricultural or business purposes during that seven-year period to preserve the reliefs. However, you may want to note that the new rules will apply for PET made on or after 30 October 2024 if the donor dies on or after 6 April 2026, i.e. this failed PET will be subject to the new £1 million cap.

If the PET was made more than three years, but less than seven years, before the death of the donor, the rate of IHT charged on the death is tapered. If the PET is made more than three years, but not more than four years, before the death, the rate of tax is reduced to 80% of the normal death rate. The rate is reduced by a further 20% for each additional year of survivorship, so that if the donor survives for more than six, but less than seven, years, that rate of tax payable on the death is 20% of the normal rate. The tax rate of a failed PET can therefore be summarised as follows:

Once the property is given away, it is important that you do not retain a benefit (or the possibility of benefiting) from the gifted asset. For example, if you were to give away the farmland but keep using it for your business, then you would be treated as continuing to own that property for IHT purposes. Therefore, IHT would be payable on that property on the death of the donor, regardless of the time that has passed since the date of the gift.

There are some exceptions to this rule. For example, if a donor were to give away property and pay a full commercial market rent for its continued use, the gift would be validly made for IHT purposes and there would not be a reserved benefit. The arrangement is normally inefficient from income tax point of view, as you – the donor – will have to pay market rent from your after-tax income, on which the gift recipient will also have to pay income tax at their marginal rate.

Lifetime gifting is complex area of tax law, specific advice should be taken on the arrangements. There are capital gains tax (CGT) implications to consider as well. For more details, please see our In Focus article on CGT and reliefs explained.

Deathbed gifting can be an effective strategy to increase your IHT allowances, specifically in relation to the RNRB. When calculating the £2 million taper threshold for RNRB, lifetime gifts are excluded for the purposes of calculating the availability of RNRB. This creates an opportunity to maximise your allowances if your estate is affected by the RNRB taper. If your estate exceeds the £2 million tapering threshold, then you may retain the full RNRB allowance by making last-minute gifts, which would otherwise be diminished by £1 for every £2 above the threshold. Using the above example of Mr and Mrs S., a last-minute gift could potentially preserve their RNRB in full and save the family £40,000.

However, it is important to keep in mind that these gifts are simply a Potentially Exempt Transfer (PET, see above), made knowing that they are likely to fail. This may help preserve RNRB, but would still be included in the IHT calculation as a failed PET.

Bear in mind however that there may be capital gains tax (CGT) to pay on making a gift of an asset such as land, as mentioned in the previous section.

No, not entirely. When you transfer assets into a company, you usually receive shares in exchange. These shares normally carry the value of the underlying assets, so if those assets appreciate in value, so will the value of your shares. The shares you hold are considered part of your personal estate and are therefore subject to IHT. It follows that putting assets into a company does not automatically remove their value from your IHT calculation. The technique used in valuing shares is different to valuing land and properties, and you would need specialist inputs when considering this option.

One of the downsides of incorporation is the potential double taxation from both an income tax and capital gains perspective. Any income or gain made by the company will be subject to corporation tax at a maximum rate of 25%. When funds are withdrawn from the company, generally by way of dividend, the owner will then be liable for income tax at their marginal rate on the distribution.

There will also be CGT implications when assets are transferred into the company, but incorporation relief would normally be available. This means any accrued gain on the assets at the time of transfer is not immediately subject to CGT. Instead, the accrued gain on the assets is “rolled over” by deducting it from the base cost of the shares you receive in exchange. There are strict conditions relating to this CGT relief and you should seek further advice before incorporation.

Yes, in theory, taking out a mortgage on your property can reduce the net value of your taxable estate for IHT purposes. This approach works by creating a liability (the mortgage debt) that offsets the property’s value, which can potentially lower the IHT bill. However, there are several key factors to consider.

Your total estate will only be reduced if the cash released from the mortgage is spent or is given away. The cash gift, funded by the mortgage, will be a Potentially Exempt Transfer (see above), and could be “brought back” into your estate for IHT purposes if you fail to survive for seven years (see above). There is also the above-mentioned reservation of benefits to consider, which could be important. This is because you may need the extra income to service the new debt. Depending on your circumstances, the loan interests could be costly and may eliminate the intended benefit of this approach. You will have to balance the costs of finance and the complex gifting rules when deciding the viability of this option.

Getting independent financial advice is crucial.

The deceased’s property cannot be sold until probate is granted, which may pose practical challenges if the estate consists mainly of property with limited cash assets to cover the IHT liability. In such situations, the executor might need to fund the IHT bill personally or through commercial borrowing, and to repay this after probate is granted. At that point, the property (or part of it) can be sold to reimburse the funds advanced. Should the value of property have increased since the date of death, CGT may apply on the gain based on the probate value. However, CGT implications are generally minimal if the sale occurs shortly after the date of death.

Yes, it is possible to pay the IHT by instalments. You can pay your IHT on items that may take time to sell in annual instalments over 10 years, but you must elect for the instalment option on your IHT return.

You will normally have to pay interest on the instalments unless you qualify for the “with interest relief” (WIR).  WIR is generally available to agricultural or business properties. This means you will only need to pay interest if you fall behind with your instalments. As long as you pay your annual instalments on or before the due date, the IHT payment can be interest-free. For further details of WIR, please see the IHT400 helpsheet and the HMRC IHT manual.

We will be updating this document regularly as more member questions or more detail from government arise.