Plan early and thoroughly – these are the take-home points from an article looking at the curtailment of UK business property and agricultural property reliefs when they apply to inheritance tax.

The following article comes from John Annetts, who is head of wealth and succession at the law firm Howard Kennedy. He writes about the need to be prepared as soon as possible for those running businesses where potential UK inheritance tax could significantly disrupt operations. As readers know, the UK now imposes IHT on owners of family-run firms and agricultural land, above a certain threshold. Prior to the Budget statement of last October, farms were covered from IHT by Agriculture Property Relief (APR), and firms by Business Property Relief (BPR). Critics say the tax will force smaller family farms to be sold and break up family firms, causing irreversible damage, and for a revenue sum that does not justify the impact. Defenders of what the UK government has done have argued that in the case of farmland, for example, wealthy owners often buy farms not to produce food profitably but to capture the tax relief, and that the system has become abused.

Annetts examines the options that business owners and their families have, both in terms of strengths and drawbacks. 

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Since the UK government announced a £1 million ($1.34 million) limit on the availability of 100 per cent business and agricultural property reliefs in the Budget in October 2024, the principal focus of the media and MPs in Parliament has been the implications for British farmers, and their ability to pass their farms to future generations, if the proposals go ahead.  

While the potential impact on other types of UK business has been far less prominent, it is likely to be at least as significant, if not more so. Figures obtained by Saffreys through a Freedom of Information request (relating to the 2021/22 tax year) and published in the Telegraph, indicate that in that year, 530 estates worth more than £1 million claimed an average BPR [Business Property Relief] of £3,735,000. Under the new rules, the average IHT bill for those estates would now be £547,000. This compares with a bill of £273,800 for farms claiming relief. 

As Saffreys noted, due to property prices being at a high level, particularly in the Southeast of England, many family businesses – local convenience stores, for example – could be caught by the £1 million limit on 100 per cent BPR, and may face a large IHT bill. In many cases, the business would have to be sold to pay this tax.

While efforts are being made in Parliament to persuade the government to delay the changes, businesses need to plan on the basis that they will go ahead. So, what are they and what can business owners do to prepare?

How and when are the APR and BPR rules changing?
-- Individuals
From 6 April 2026, the government plans to introduce a rolling £1 million allowance on 100 per cent relief, which will renew every seven years, and which will be shared between qualifying agricultural and business property. For qualifying property over the £1 million allowance, relief will be capped at 50 per cent, giving rise to an effective 20 per cent rate of IHT.
-- Trusts
Trustees will also have a £1 million allowance on property qualifying for 100 per cent relief. This will apply to relieve IHT charges that arise on each 10-year anniversary of a trust's creation at up to 6 per cent of the trust fund, as well as when property leaves the trust.   

The trustees' allowance will refresh every 10 years, so if some or all of it is applied against one or more exit charges during a 10-year period, only any remaining balance will be available to provide 100 per cent relief at the next 10-year anniversary. 

As for individuals, 50 per cent relief will apply to any qualifying property over the available threshold.

If more than one trust is set up by the same settlor on or after 30 October 2024, they will all share a single allowance.  

What can business owners do to prepare before 6 April 2026?
Business owners should use the months before April 2026 to review their business and how it is structured, and what options may be available to mitigate the level and effect of any IHT charge. Possible options include the following:

Lifetime planning
-- Transfer qualifying business property to a spouse or civil partner, if relevant – all individuals will be entitled to their own £1 million BPR allowance, but under the current proposals, it will not be possible to transfer any unused allowance to a surviving spouse or civil partner. Accordingly, make sure that if you are part of a couple, you both own fully relievable property up to the £1 million allowance. 

-- In appropriate circumstances, make gifts to family members or others whom you wish to inherit your business property. Outright gifts of property of any type will continue to qualify as "potentially exempt transfers" (PETs) and pass free of tax provided the donor survives for at least seven years from the date the gift is made. As such gifts may dilute your control of the company, it is important to consider carefully the level and recipient of any such gift.

-- Transfer property into trust – until 6 April 2026, there is no immediate IHT charge when property qualifying for 100 per cent BPR or APR is transferred into a trust, regardless of its value. However, bear in mind the 10-yearly and exit charges to tax that may apply to trust property above the trustees' available £1 million allowance, discussed above.  

Making a gift into trust, rather than outright, avoids ceding control to any individual beneficiary. However, it is important to choose your trustees with care, and to ensure that you are not a beneficiary of the trust to avoid the property being brought back into your estate under the rules for gifts with a reservation of benefit (GROBs). 

-- Alternative structures such as family investment companies (FIC), for example, or other forms of corporate restructuring, may provide an alternative to trusts in appropriate circumstances. One advantage of corporate structures over trusts is that 10-yearly and exit charges to IHT do not apply. However, trusts may provide greater asset protection, where this is relevant.  

FICs and other corporate structures may offer valuable flexibility, in that different share classes can be created – non-voting shares providing value without control to children, for example. This can enable business owners to transfer control to the next generation on a gradual basis, perhaps establishing wealth management and transition processes in the articles of the company or other governing documents. A formal valuation would be required to accurately value different classes of shareholding, and capital gains tax (CGT) and other tax issues would also require consideration. 

-- Take out a life insurance policy – under the existing rules, life insurance proceeds will fall outside the IHT net and may be used by beneficiaries to pay any IHT bill following the owner's death, for example, if they do not survive for seven years after making a gift or settling property into trust. This is an example of where a valuation will be crucial to determine the level of cover required.

-- Borrow or sell parts of the business to realise funds to pay future IHT – where this is possible it has an additional advantage of reducing the overall value of the business for tax purposes.

Estate planning
-- Make a will, or if you already have one, review it to ensure that it includes appropriate provision for your business property. A gift of business property may need to be amended to include partly relievable, as well as fully relievable property, for example.  

Valuation and capital gains tax (CGT) considerations
-- Value APR/BPR qualifying property – to plan properly, it is important to know the value of both fully relievable and partly relievable property that you own. Valuations are likely to take time, not least because of the number of businesses seeking them before the end of the tax year, so it is vital to act quickly. 

-- CGT – when making a gift or transfer of business property into a trust or other structure, the CGT consequences will also require consideration. Holdover relief may be available to avoid an immediate CGT charge on any such transfer. Where it applies, the recipient of the property inherits the base cost of the transferor. 

However, there are two types of CGT holdover relief, and the conditions that apply for relief on transfers of property into trust differ from those that apply to transfers to individuals, companies and other entities. Where property is not being settled, for a gain to qualify for holdover relief, a trading threshold applies, whereby at least 80 per cent of the assets, turnover and activity in the business must relate to the trade.  

This is far more stringent than the threshold for BPR, whereby the business must not consist “wholly or mainly” of dealing in shares, land or buildings or making or holding investments.  ("Wholly or mainly" is generally considered to mean more than 50 per cent.)

And finally
Business owners should begin their review of the options available and start to make plans as soon as possible before 6 April 2026. However, before implementing any strategy they should take advice as to how the new rules may affect them, or any trusts of which they are the settlor or trustee, and whether their strategy is the best possible in all the circumstances.  

About the author
John Annetts is head of wealth and succession at Howard Kennedy. He specialises in acting for UK HNW and UHNW individuals and families in relation to their tax and succession planning, and the administration of high-value and complex estates.