As announced by the UK Government on 30 October 2024 ('Budget Day'), draft legislation has now been published confirming reforms to two key inheritance tax reliefs: business property relief ('BPR') and agricultural property relief ('APR').
This article focuses on the main changes to the BPR regime to take effect from 6 April 2026 and there is a list of action steps that business owners and farmers can look at doing now, whilst we wait for final confirmation of the full details of the new regime at the 26 November 2025 Budget. Time will be tight following the Budget and before the end of the tax year and so it is advisable to start taking steps now in respect of any action you may wish to take.
Changes for business owners
Current regime on death
Inheritance tax ('IHT') is usually levied at 40% on the value of an individual's estate on their death. This is subject to the first £325,000 which is taxed at 0%, to the extent that this 'nil rate band' has not be exhausted by gifts made in the seven years preceding death.
Under the existing BPR regime, for individuals holding relevant business property qualifying for the relief as at the date of death, the amount of relevant business property to which the relief can apply is uncapped, either at a rate of 100% (meaning an effective rate of IHT at 0% on the qualifying property) or 50% (meaning an effective rate of IHT at 20%). The rate of the relief will depend on the specific type of the relevant business property.
For deaths prior to 6 April 2026, the current regime will remain.
Deaths occurring on or after 6 April 2026
However, from 6 April 2026, 100% BPR will only apply to an individual's first £1 million of 100% qualifying relevant business property held (combined with any property qualifying for APR). BPR will then be available on 50% of the qualifying amount exceeding the £1 million allowance. This means that IHT will be payable on death at an effective rate of 0% on the first £1 million of relevant business assets, and up to 20% thereafter. Any life interest of the deceased in a qualifying interest in possession ('QIIP') trust will be aggregated with their death estate for IHT purposes meaning that the £1 million allowance will apply across the personally held estate and the QIIP.
Where a surviving spouse/civil partner inherits qualifying relevant business property on the death of their spouse/civil partner, they also inherit the deceased's ownership period (but importantly they do not inherit an additional £1 million allowance).
For business owners now looking to transfer all or a proportion of their qualifying relevant business property during their lifetime, perhaps to take advantage of multiple £1 million allowances, understanding the new BPR regime is essential.
Lifetime gifts
For outright gifts made now of relevant business property qualifying for BPR, the usual seven-year survivorship period applies. If the donor dies on or after 6 April 2026, the £1 million allowance will apply to such gifts. Where the donor survives the gift by at least three years (but dies with seven years of making the gift) taper relief will reduce the effective rate of IHT on the amount exceeding the £1 million allowance. If the donor survives the gift by seven years their £1 million allowance is not used up by making the gift.
Much like an individual's 'nil rate band' allowance, an individual's £1 million BPR allowance will be refreshed every seven years, and the £1 million amount will be adjusted for inflation from 6 April 2030.
Although qualifying relevant business property held by one spouse can be gifted to the other free of IHT during lifetime, the recipient spouse will not inherit the donor's ownership period; instead they will need to hold the relevant property for the requisite two-year minimum period in order for the relevant business property to 're-qualify' for the relief. As such, in many cases inter-spousal lifetime gifting may not be appropriate.
There are transitional rules that apply for gifts made prior to 6 April 2026, and specific advice should be sought if this is relevant.
For business owners concerned that the next generation are not yet capable or ready to take on the responsibility of a business, using a trust to hold qualifying relevant business property may be the most appropriate mechanism to transfer the business (or portion of it) for their benefit, whilst maintaining control and protecting assets.
Changes for trustees
For trusts created on or after 6 April 2026, transfers into a trust of relevant business property qualifying for BPR will be subject to the £1 million allowance, again with 50% of the excess immediately chargeable at the lifetime chargeable transfer rate (20%). The amount will be higher where the settlor pays the charge.
Where the settlor dies within seven years of making the transfer into trust, a further IHT lifetime chargeable transfer charge will apply on the same value transferred in excess of the £1 million allowance (ie an effective rate of IHT at 10%).
Where a settlor creates multiple trusts on or after 6 April 2026, the £1 million allowance will be applied in chronological order to each trust. Each trust's allowance will apply during the trust's lifetime and this will refresh every ten years.
Exits (capital distributions) occurring prior to the first ten-year anniversary of a post 5 April 2026 trust or between ten-year anniversaries will reduce the available allowance of the trust at each ten-year anniversary. The effective rate of tax on the relevant business property at each ten-year anniversary will be 3% on the amount exceeding the £1 million allowance (or proportion of that allowance) of the trust.
Historic trusts with the same settlor and holding property qualifying for 100% BPR as at 29 October 2024 will each have their own respective £1 million allowance and this will apply from the trust's first ten-year anniversary on or after 6 April 2026. Transfers into trust made between Budget Day and 6 April 2026 will fall under the current regime, but will become chargeable if the settlor dies on or after 6 April 2026 and within seven years of the transfer.
Complex transitional rules will apply to trusts existing prior to 6 April 2026 and on transfers into and out of trust occurring prior to 6 April 2026. Withers can provide tailored advice.
Changes for AIM share investors (and other shares not listed on markets of recognised stock exchanges and qualifying shares on unrecognised foreign exchanges).
Before 6 April 2026, AIM shares could qualify for 100% BPR. However, from 6 April 2026, IHT relief for AIM shares will be reduced to 50% and the £1 million BPR allowance will not be applicable on AIM shares. Transitional rules will apply on value transferred that is attributable to AIM shares on or after Budget Day where the transferor dies on or after 6 April 2026.
Other considerations
Funding the IHT liability
The draft legislation has confirmed that it will be possible to pay the IHT liability relating to the restricted BPR interest-free in ten-yearly instalments. However, the fact remains that whereas previously owners and trustees may never have expected an IHT liability to arise on assets qualifying for BPR, for businesses valued over £1 million, there will now be an IHT liability. It will be crucial to consider funding the tax as part of the overall business, estate and trust planning strategy.
Capital gains tax ('CGT')
Any tax planning with BPR must take into account CGT implications, whether that is in respect of the CGT uplift on death (rebasing an individual's personally held assets to the date of death values) or on gifting to individuals or transfers into trust and the availability of CGT hold over reliefs.
What can you do now to protect your business assets?
- It may seem obvious but should not be overlooked: identify your asset base and those assets which you expect to qualify for BPR, including any AIM shares.
- Obtain up to date valuations of assets qualifying for BPR, taking into account any minority discounts: valuation will now be a crucial element to all BPR planning.
- Review your estate plan: ensure your will deals with BPR and consider how this works with the spouse exemption. Do you want to 'bank' your BPR allowance and pass down to the next generation on the first death? Do you want to make outright gifts now, or would you prefer to retain an element of control?
- How will IHT liabilities be paid? Consider obtaining life insurance and review existing policies to cover the IHT bill. Ensure policies are written into trust so they are not in turn, subject to IHT.
- Review any pre-existing trusts holding assets qualifying for BPR (or APR), including trusts existing prior to Budget Day. Do any hold AIM listed shares?
- Are you considering leaving the UK? Take advice on your IHT position and any appropriate family planning vehicles which may take qualifying relevant business property assets out of the UK tax net altogether.
In the coming weeks we will be looking more closely at the planning that can be carried out in a series of case studies based on what our clients are doing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
