Inheritance Tax reform: What does it mean for you?

The inheritance tax (IHT) changes to Business Relief (BR) and Agricultural Relief (AR) announced in the 2024 Autumn Budget came into effect on 6 April 2026 and represent one of the most significant inheritance tax reforms for family businesses and farming families in recent years.

While some may say relief remains ‘generous’, it is no longer unlimited. The introduction of the £2.5 million 100% relief allowance means many estates that previously expected no inheritance tax exposure will now face an effective 20% charge on qualifying assets for values exceeding £2.5million.

Many business owners and farmers are still coming to terms with what this means to them in terms of their IHT exposure, what they can do to mitigate their IHT exposure, and how the IHT will be funded.

Recap on the Changes

Under the new rules:

• The first £2.5 million of combined qualifying BR and AR assets continues to receive 100% relief.
• Any qualifying assets exceeding £2.5 million receive relief at only 50%.
• As inheritance tax is charged at 40%, assets receiving only 50% relief suffer an effective IHT charge of 20%.
• Importantly, any unused £2.5 million allowance can be transferred to a surviving spouse or civil partner. Consequently, married couples and civil partners may potentially pass on £5 million of qualifying APR and BPR assets at 100% relief.
• The IHT due on qualifying assets can be paid over a 10-year period.

7 Planning Priorities

Given the potentially significant impact on a business owner/farmer’s IHT exposure, early planning, to at least form a tax mitigation strategy, is recommended.  Planning priorities could include (but are not limited to);

1. Succession Planning – The changes mean that succession planning should now be revisited as a matter of priority. Business owners/farmers have historically structured their succession plans on the assumption that BR and/or AR would eliminate IHT entirely.  For many, these assumptions no longer hold true, forcing, in many cases, to accelerate passing on the family business sooner than planned.
2. Reviewing asset values to quantify future IHT exposure
3. Updating wills to maximise available reliefs and transferable allowances
4. Considering lifetime gifting strategies where appropriate.
5. Reviewing shareholder and partnership structures.
6. Assessing trust planning opportunities.
7. Examining life insurance solutions to fund anticipated liabilities.

Impact of the changes on trusts

The changes also impact trust arrangements.  The £2.5million 100% allowance, and 50% relief for values in excess of £2.5milion, equally apply to trusts which own qualifying BR and/or AR assets.

The changes could result in impacted trusts now suffering IHT ten-year charges and exit charges which previously didn’t arise.

Importantly, the changes do not kick in until the first 10-year anniversary post 5 April 2026, which does provide an opportunity for Trustees to plan under the old rules with unlimited 100% relief potentially available.

In light of this, Trustees are urged to;

• review current trust arrangements,
• quantify potential IHT liabilities,
• put a plan in place to fund the potential liabilities
• and, where appropriate, consider distributing qualifying assets prior to the next 10-year charge.

Pensions

As highlighted in our earlier blog ‘Inheritance Tax on pensions – 5 ways you can prepare introduced, a fundamental shift to Inheritance Tax on pensions. From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of an individual’s estate for IHT purposes.

This could give rise to an effective 40% tax rate. This charge will apply to the value of the notional pension property, which is broadly the total value of the pension arrangements at death – excluding certain benefits.

In addition, where an individual dies aged 75 or over, not only can the pension value suffer Inheritance Tax at 40%, but the pension benefits may also be subject to Income Tax in the hands of the beneficiaries. This creates the potential for an effective tax rate of up to 67%.

How AAB can help

Reforms to Inheritance Tax on agricultural property, business property and pensions represent a fundamental shift in how these assets are treated on death. For business owners and high-net-worth individuals who will be affected by these changes, this is the time to revisit pension structures, succession plans, and tax mitigation strategies.

Advice should always be sought before reviewing your pension arrangements. If you would like to discuss any of the points raised above, then please do not hesitate to get in contact with Paul Halliday, Katie Coleby, or one of our experts in the Private Client tax team, or your usual AAB contact.