Budget: Major Changes to Inheritance Tax Reliefs

From 6 April 2026, the Government announced that Business Property Relief (BPR) and Agricultural Property Relief (APR) at 100 percent will be capped to the first £1 million of qualifying assets and thereafter the relief will effectively reduce the IHT payable by 50 percent.

BPR and APR are long established tax reliefs that can reduce the inheritance tax (IHT) that is paid on death and in certain other situations, often eliminating any charge to IHT. Those reliefs are continuing, but with effect from 6 April 2026 their impact will be to effectively halve rather than eliminate the standard IHT rates. 

In addition, for those who are or intend to live overseas, the Government provided further clarification about how their IHT exposure will be assessed from 6 April 2025. This should provide greater certainty as to when personal or trust assets owned will be within the scope of IHT. Currently this partly depends on ‘domicile’, which was a difficult concept to apply, leading to uncertainty for some people affected. From 6 April 2025 it will be based on the much more codified concept of ‘residence’ in place of domicile.

This article focuses on what the BPR and APR changes mean for individual and trustee owners of businesses and agricultural assets. For the sake of simplicity, it ignores the £1m allowance on which 100 percent BPR/APR can still apply and it ignores the possibility that such assets might have moved into or out of the scope of IHT on residence grounds.

More information on the announcements can be found in the Implications for Individuals section of our Autumn Budget page.

BPR reduces the value of qualifying business property chargeable to IHT. Depending on the type of asset, the reduction in value will either be at:

• 100 percent for assets such as (but not limited to) unincorporated businesses, an interest in a business like a partnership share or unquoted shares ), or shares listed on an alternative stock exchange (such as AIM); or
• 50 percent for assets such as (but not limited to) land/buildings or equipment used on a business but owned personally by the business owner.

Generally the asset needs to have been owned for two years before the relief can be claimed.

APR reduces the agricultural value (which can be different to the total value) of qualifying agricultural property chargeable to IHT. Depending on the terms of the farming tenancy, generally the reduction in value will either be at 100 percent for assets occupied by the deceased for at least the two year period prior to death, or let to a tenant farmer and owned for at least the seven year period prior to death. 50 percent relief applies otherwise.

These changes will affect:

• Individuals making lifetime gifts of assets to other individuals and on gifts of assets into trusts; and
• Individuals leaving assets in their estates on death.
  

At present choosing to make lifetime gifts to pass on wealth can reduce tax liabilities arising on death. Such gifts can fall into two categories:

• Potentially Exempt Transfers (PETs) which are gifts to individuals that are exempt from IHT if the person giving the assets away survives for seven years after making the gift. Should the ‘giver’ die within that period, the gift is a ‘failed PET’. IHT charges can then sometimes become due as the BPR/APR claimed on the original gift is clawed back; and
• Chargeable Lifetime Transfers (CLTs) which are normally gifts by an individual to a trust which, in the absence of IHT relief, are subject to an immediate lifetime IHT charge of 20 percent when the gift is made. If various conditions are met, assets given to trusts do not then form part of the estate of the ‘giver’ when they die. But if the giver does not survive for seven years after making the gift, then the original gift is reassessed on death and in certain cases the BPR/APR claimed on the original gift is clawed back.

As death, and hence when such IHT becomes due, cannot be predicted, lifetime transfers made between 30 October 2024 and 6 April 2026 could have different future tax outcomes so it is important to seek advice.

Given these different outcomes and the proposed new limits for APR and BPR under the new rules, this is an opportune moment for families to review their succession plans. There are many other tax consequences to be considered related to such action, particularly the extent to which the value of assets do actually qualify for BPR/APR, IHT consequences of passing away within seven years of the CLT and capital gains tax. Appropriate legal advice should always be obtained. Given availability of BPR/APR at 100 percent will be capped from 6 April 2026, tax valuation will become even more important to confirm the tax liability on lifetime gifts.

These changes will affect trustees of trusts that own assets that qualify for BPR and APR. Trustees will need to assess their exposure to IHT in the event of the trust IHT 10-year charge and IHT charges in respect of trust capital distributions. There will also be an impact on any assets held in qualifying income in possession trusts ‘QIIP’ (where the assets are treated as part of the estate of the life tenant). A charge to tax may arise for trustees on the death of the life tenant or where the QIIP otherwise comes to an end.

Trustees with a 10-year charge date (or exit charge date) that falls before 6 April 2026 will calculate their IHT exposure under the current rules.

So the impact of the proposed new reforms will affect the IHT due in respect of the first IHT 10-year charge (and exit charges) that falls on or after 6 April 2026. It remains to be seen how new legislation will proscribe how that first 10-year charge calculation factoring in the new regime for BPR/APR assets will be done. The content of the promised technical consultation in early 2025 will be the first opportunity to see how such important new practical issues might be addressed by the Government.

After a prolonged period of speculation about IHT changes, we now have some clarity. With 18 months before the proposed BPR/APR reforms come into force, taxpayers should start assessing the impact of the proposals on their plans for succession. But each taxpayer will be in a different position and so it is important that appropriate advice is taken before taking any action in response to the proposed reforms.

Matters to consider would include:

• Are you impacted: are you in scope of IHT, do you qualify for BPR or APR, do you have any related loans? 
• What will the likely IHT exposure be?
• How would it best be funded?
• Is there action to take? and
• When should those actions be taken?

It would be easy to forget when considering these matters that BPR and APR remain extremely valuable and if you are unsure whether your assets qualify it will be worthwhile evaluating this.

Please get in touch with the authors or your usual KPMG in the UK contact to discuss further.

For further information please contact:

• Daniel Crowther
• Hannah Barraclough