On 27 February 2025, HM Revenue & Customs released a consultation (“Consultation“) on the reforms to inheritance tax (“IHT“), business property relief (“BPR“) and agricultural property relief (“APR“) that the Chancellor Rachel Reeves had originally proposed in the Autumn 2024 Budget (“Budget“). Such reforms are scheduled to take effect from 6 April 2026 and effectively remove the unlimited IHT relief that can currently apply to qualifying agricultural and business assets.
The Budget proposals sparked controversy and a strong response from those affected, particularly across the farming community, for whom the proposed reforms will have a significant personal impact in many cases, and protests have been held in London and across the country.
The aim of the Consultation is to gather feedback on the technical aspects of the proposed reforms. Unfortunately for those affected, the Consultation does not seek views on the policy itself and the Consultation expressly states that the aim of the process is not to seek views on alternative proposals. It therefore appears that the government is set on going ahead with the general framework as outlined at the Budget.
Wedlake Bell will be submitting a response to the Consultation to represent the interests of our clients with agricultural and/or business assets.
The background to APR / BPR
APR applies to qualifying land and property situated in the UK which is used for agricultural purposes (“APR property“).
BPR applies to qualifying assets such as a business, a partnership interest and shares in unquoted companies, whether situated in or outside the UK, provided the underlying business is trading and not mainly carrying on investment activities (“BPR property“).
At present, APR/BPR property receives up to 100% relief from IHT with no cap on the amount of relief. This can enable family businesses and agricultural estates to pass down to younger generations on death without an IHT charge.
The Budget proposals
The Budget included the following proposals on APR and BPR to take effect from 6 April 2026.
- £1 million allowance – the combined value of APR/BPR property that can benefit from IHT relief at 100% to be limited to £1 million. At present, an unlimited amount can qualify for 100% relief.
- 50% relief after £1 million – where the value of APR/BPR property exceeds the proposed £1 million allowance, the excess value will effectively be subject to IHT at the rate of 20% (being the main rate of IHT at 40% with 50% relief).
- AIM shares – the value of shares not listed on a recognised stock exchange (such as the Alternative Investment Market – AIM) will qualify for BPR at 50% relief only. Such shareholdings will not benefit from the £1 million allowance.
- APR/BPR property settled into trusts before the Budget (30 October 2024) – the trust will effectively receive its own £1 million allowance for any APR/BPR property it holds.
- APR/BPR property settled into trusts on or after 30 October 2024 – the £1 million allowance will be shared between all trusts set up by the same settlor, rather than each trust having its own £1 million allowance.
The Consultation proposals
Some key points from the Consultation are as follows.
Individuals
- Seven-year rule – the £1 million allowance will refresh every seven years in a similar way to how the IHT nil-rate band (currently £325,000) operates. This means that if an individual makes a gift of APR/BPR property (either outright or into trust) valued at up to £1 million and survives seven years, there will be no IHT due on those gifts on death and the individual will be entitled to a new £1 million allowance to use over the next seven years; and so on, every seven years. For those who are not yet in later life, this provides a helpful planning opportunity to gradually pass on APR/BPR property to the younger generation without an IHT charge, with the ultimate aim of reducing the value of the APR/BPR estate to under £1 million by death. Gifts to spouses/ civil partners are IHT exempt and do not reduce the £1 million allowance.
- Transferability of the £1 million allowance – any unused portion of the £1 million allowance will not be transferable between spouses and civil partners: a “use it, or lose it” approach. This is disappointing as the unused IHT nil-rate band of a deceased spouses and civil partners is transferable to the survivor. Spouses/ civil partners will therefore need to ensure that they both make full use of their £1 million allowances to maximise the amount of IHT relief that their combined estate can benefit from.
- Gifts of APR/BPR property made before 30 October 2024 – such gifts will not be affected or use up the individual’s £1million allowance.
- Gifts of APR/BPR property made after 30 October 2024 – if the individual survives the gift by seven years, no IHT will be payable. The same will apply if the individual dies before 6 April 2026. If the individual dies on or after 6 April 2026, however, and fails to survive the gift by seven years, the £1 million allowance will apply and any excess value will be subject to IHT at the effective rate of 20%.
Trusts
- Trusts with BPR/APR property as at 30 October 2024 – these will have their own £1 million allowance. If the settlor adds further BPR/APR property to the trust after 6 April 2026, this will not taint the trust in any way. If the trustees distribute APR/BPR property out of the trust before 6 April 2026, triggering an IHT exit charge, the £1 million allowance will not apply and 100% IHT relief will still be available. The £1 million allowance will however be applied at the subsequent ten year anniversary of the trust.
- Trusts of APR/BPR property set up on or after 30 October 2024 – the £1 million allowance will be shared between all such trusts set up by the same settlor, allocated in chronological order. The allocation of the £1 million allowance for each trust will apply for the lifetime of the trust.
- Ten-year rule – the £1 million allowance for trusts will refresh on every ten year anniversary date of the trust. This means that for each of the trust’s IHT ten-year charges, there will be a new £1 million allowance to use. This is logical and fair, but unfortunately will not mean that another £1 million of BPR/ APR assets can be added to the trust without IHT consequences for the trustees.
- Ten-year anniversary and exit charges – the Consultation explains how the £1 million allowance will operate from a technical perspective in respect of these IHT charges which is beyond the scope of this note but will be the subject of a separate briefing.
- Life interest trusts – APR/BPR property in a trust in which a beneficiary has a “qualifying interest in possession” (certain categories of trust where a beneficiary is entitled to the income from the trust for life) will effectively share the £1 million allowance with assets that the beneficiary owns outright.
IHT payments
- The government will extend the current rules governing payment of IHT by instalments so that IHT on APR/BPR property (whether payable in respect of an individual or a trust) can be paid by ten annual instalments without interest being applied to those instalments. This is not always possible currently.
Next developments
The Consultation period closes on 23 April 2025 and interested parties and their professional advisers are invited to respond. Wedlake Bell will be submitting a response.
There will be a further consultation later this year when the government publishes the draft legislation. This will be focused on the technical drafting of the measures.
Whilst significant changes to the general policy look very unlikely, the Consultation provides an opportunity for those affected to put across views and technical adjustments to the proposals. If the policy generally goes ahead as proposed, there is planning that can be put in place to mitigate the effects. We would be pleased to discuss options with affected clients.
This article is for general information only and does not seek to give legal advice or to be an exhaustive statement of the law. Specific advice should always be sought for individual cases.