Understanding the proposed inheritance tax reforms

The autumn budget included substantial changes to the inheritance tax (IHT) regime, presenting new challenges for rural landowners and family businesses. From April 2026, agricultural property relief (APR) and business property relief (BPR) at 100% will only be available for the first £1m of qualifying assets. The value of assets exceeding this cap will be eligible for 50% relief.

These reforms could significantly affect owners of farming or business assets with a total value above the cap and available nil-rate bands. The CLA is concerned that restricting the reliefs in this way could lead to the breakup of viable businesses.

It is important to note that the government has yet to publish the draft legislation and we can only base this article on limited available material. Nonetheless, we outline the key changes and highlight some practical steps that could be taken as part of your succession planning. These include restructuring ownership, making lifetime gifts and using life insurance. However, these suggestions will only be helpful if they are appropriate to your family circumstances and if you have the available finance to put them into place; please seek professional advice before taking any action. The CLA continues to advocate members’ interests to the government and is actively campaigning against the proposed policy changes.

Rural businesses have traditionally relied on 100% APR and BPR to enable their family business to be transferred seamlessly across generations. However, the government intends to restrict these reliefs from April 2026 as follows:

• Reliefs capped: The combined APR and BPR available on death will be capped at £1m.
• Partial relief beyond the cap: Qualifying assets exceeding £1m will only attract 50% relief.
• Standard IHT allowances retained: The nil-rate band (NRB) of £325,000 and residence nil-rate band (RNRB) of £175,000 remain available.

Other exemptions, such as spousal transfers, and IHT reliefs, such as woodland relief, are unaffected.

Consider Mr D, a divorced farmer with a £1.95m estate, including farmland valued at £1.5m that he farms in hand and a farmhouse valued at £450,000 (£300,000 agricultural value). Under current rules, full APR/BPR would apply to the farm, leaving only the nonagricultural value of the farmhouse subject to IHT. If he passes the house to children or grandchildren, this non-agricultural value will be covered by the RNRB.

However, under the new rules, the APR/BPR cap increases his chargeable estate. After applying the £1m relief cap and 50% relief and the NRB and RNRB, Mr D’s taxable estate becomes £50,000 taxed at 40%, giving an IHT liability of £20,000.

As it appears that the £1m of APR/BPR will not be transferable, a couple may need to review how their assets are held and reorganise their ownership of them, and review their wills. If they currently plan to leave everything to a spouse on death one, with assets passing to their children on death two, £1m of relief will be lost and unavailable on death two. Only if each parent gifts qualifying assets of £1m on death will the maximum of £2m of APR/BPR be achievable.

Mr S is married; he owns and farms a £4.2m farm as a sole trader. If he leaves the farm to his wife on his death, and she then leaves it to their son and daughter on her death, the overall IHT liability is £380,000.

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

If, however, Mr S farmed in partnership as a joint owner with his wife, and they each pass their respective shares in the partnership directly to their children, the IHT liability would be £80,000, saving £300,000.

Note: (2) RNRB is tapered by £1 for every £2 when the estate is over £2m 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.

The key actions to consider to ensure that £1m of APR/BPR is available on each death is:

• Joint ownership of business assets or if they are assets held in a partnership (or other suitable business structure), review ownership shares.
• Updating wills to pass assets on the first death directly to the next generation or to a discretionary trust.
• Considering the impact of the RNRB taper on estates exceeding £2m.

Succession planning can include considering whether to make any lifetime gifts. Landowners can use the following approaches:

• Exempt gifts: Every taxpayer can gift £3,000 annually or make regular gifts out of surplus income, which are free from IHT immediately.
• Potentially exempt transfers (PETs): A gift from one person to another is generally exempt from IHT if the donor survives for seven years afterwards, classifying it as a ‘potentially exempt transfer’. Such gifts do not attract IHT at the time of transfer and do not need to be reported to HMRC. If the donor dies within seven years, the gift’s value is included in the IHT calculation, after using any available NRB.

Reliefs such as APR and BPR (subject to the new rules) may apply to protect a failed PET, provided the gifted assets qualify for these reliefs at the time of the gift and at the donor’s death. It is therefore important that the gifted assets continue to be used for agricultural or business purposes during the seven-year period. It is worthwhile to note that a failed PET made after 30 October 2024 will be subject to the £1m APR/ BPR cap if the donor dies on or after 6 April 2026.

• Avoiding reservation of benefit: When gifting property, it is crucial to ensure the donor does not retain any benefi t or the possibility to receive any benefit from the asset, classifying the gift as a ‘reservation of benefit’. In such cases, the property remains part of the donor’s estate for IHT purposes, regardless of how much time has passed since the gift was made, and IHT will be payable upon the donor’s death.

An exception applies if the donor pays full commercial market rent for continued use of the property. However, this is often inefficient from a tax perspective. The donor must pay rent from after-tax income, while the recipient is taxed on the rental income at their marginal rate, creating a double tax charge.

Lifetime gifting is a complex area of tax law involving additional considerations, such as potential capital gains tax (CGT) liabilities. It is essential to seek professional advice.

Insurance can help families with IHT liabilities. Whole-of-life insurance policies provide a payout to cover IHT exposure, preventing the forced sale of assets such as land or other business assets. You can also use life insurance in connection with a lifetime gift to pay out and cover the IHT liability if you die in the seven years after making the gift.

Please consult a professional broker, such as SPF Private Clients, part of CLA Insurance or chartered financial planners Lift-Financial who can give advice on coverage levels, and premium costs. This can be an expensive option and so may not be suitable for everyone.

The budget announcement highlights the importance of succession planning. Please visit our hub below or speak to a member of the CLA tax team.