IHT Business & Agricultural Relief: £2.5m Cap

Inheritance tax relief thresholds for Agricultural and Business Property Reliefs reform came into effect on 6 April 2026. Business Property Relief (BPR) and Agricultural Property Relief (APR) — the two reliefs that have historically allowed farming families and business owners to pass assets to the next generation largely free of inheritance tax — are no longer unlimited. For clients who have relied on these reliefs without a cap, the change has created a new Inheritance Tax (IHT) exposure that requires urgent estate planning attention.

Accountants advising clients with qualifying business or farming assets are at the centre of these conversations. The technical complexity is significant, but the first task is simpler: identifying which clients are affected and making contact.

What Has Changed: The £2.5 Million Cap

Under the previous rules, BPR and APR were available at 100% on unlimited qualifying assets. A farmer with £5 million of qualifying agricultural property paid no IHT on that property at all. A business owner with £3 million of qualifying business property similarly paid no IHT.

From 6 April 2026, the 100% rate applies only to the first £2.5 million of combined qualifying agricultural and business property. Any qualifying assets above this threshold receive relief at 50% — meaning 50% of their value is included in the taxable estate at the applicable IHT rate.

The allowance is transferable between spouses and civil partners, allowing couples to combine their individual £2.5 million allowances into a joint allowance of up to £5 million. The allowance refreshes every seven years — relevant for lifetime giving strategies. From 6 April 2031, the £2.5 million allowance will be index-linked to the Consumer Prices Index.

AIM shares and other shares not listed on a recognised stock exchange, which previously qualified for 100% BPR, now qualify for 50% BPR only. This change applies regardless of the £2.5 million allowance — the 50% rate for AIM shares is a separate reform.

Illustrating the Impact

Consider a farming couple who jointly own a farm worth £6 million, all of which qualifies for APR. Under the pre-April 2026 rules, their estate would have paid no IHT on the farm on first death and no IHT on second death either, assuming the full nil rate band was available.

Under the new rules, on first death the surviving spouse inherits free of IHT (exempt transfer between spouses). On second death, the combined £5 million allowance (two × £2.5 million, transferable) shields the first £5 million of qualifying assets. The remaining £1 million of qualifying assets receives 50% relief — so £500,000 is included in the taxable estate. At 40% IHT, that represents £200,000 of additional tax. Without careful estate planning, this is a material new liability for the family.

For a business owner with qualifying assets of £4 million, the single allowance of £2.5 million means £1.5 million of qualifying assets receives 50% relief — £750,000 is taxable at 40%, generating £300,000 of IHT that did not exist under the previous rules.

Planning Actions: What Is Still Available

The transition date has passed, but significant planning remains possible.

Review wills, particularly for married couples
Many wills include standard clauses directing all APR/BPR-qualifying property to children, with non-qualifying assets passing to the surviving spouse. Under the previous unlimited rules, this made sense. Under the new capped rules, these clauses may waste the first spouse’s £2.5 million allowance if the entire qualifying property passes to children. Wills need to be re-examined to ensure the £2.5 million allowance of the first to die is used efficiently.
Consider lifetime giving strategies
The combination of the £2.5 million allowance and the £325,000 nil rate band means a married couple could potentially settle up to £5.65 million into trust every seven years without triggering an immediate IHT charge. Regular lifetime transfers into trust have become more compelling as a strategy for clients with assets above the combined £5 million threshold.
Review use of gifts out of surplus income
The gifts out of surplus income exemption — which allows IHT-free lifetime gifts from regular income that does not reduce the donor’s standard of living — is frequently overlooked in estate planning reviews. For clients with significant qualifying income streams from their business or farm, this is worth reassessing.
Consider life insurance
For clients with a clear and quantified new IHT exposure, whole-of-life or decreasing term insurance written in trust can fund the anticipated IHT liability. The cost of the premium needs to be weighed against the IHT exposure, but for clients in good health this is often an efficient solution.
Pension planning requires review
From 6 April 2027, most unused pension funds and death benefits will be included in the estate for IHT purposes. Combined with the APR/BPR cap, this creates a significantly different IHT landscape for business owners and farmers who have used pensions as part of their estate planning. Qualifying assets in pensions will not benefit from APR or BPR. A comprehensive review of pension, property, and business asset allocation is now essential for affected clients.
Trust structures
Existing trusts settled with qualifying property before 30 October 2024 each have their own £2.5 million allowance. For clients with existing trusts, the interaction between the trust allowance and the personal allowance requires careful analysis.

BrightTax supports the tax return and IHT compliance workflow for accountants advising clients with business and farming assets — including returns for estates, trust 10-year charges, and self-assessment for individuals with complex property and investment structures.

The Wider IHT Changes to Track: Pensions from April 2027

One year on from the APR/BPR cap, another significant IHT change arrives. From 6 April 2027, most unused pension funds and death benefits will be drawn into the estate for IHT purposes. This ends the longstanding planning approach of leaving pensions intact as an IHT-free inheritance vehicle.

For affected clients, this means their total estate — including pension wealth — may now be significantly larger than previously assumed for IHT planning purposes. The interaction between the new pension IHT rules, the APR/BPR cap, and the nil rate band requires a full consolidated estate assessment. Clients who were previously told their estate was “within the reliefs” may need that analysis redone with current numbers.

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.