Inheritance Tax Changes from April 2026: New £2.5 Million Cap on Business and Agricultural Relief

Significant changes to Inheritance Tax (“IHT”) are coming into effect from 6 April 2026, particularly for business owners, farmers and landowners.

For many years, Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”) have been central to estate planning, often allowing valuable assets to pass between generations with little or no IHT liability. However, the introduction of a new £2.5 million cap on 100% relief represents a fundamental shift in how these reliefs operate.

While the headline rate of IHT remains unchanged, the practical effect of these reforms is that more estates – particularly those holding business or agricultural assets – may now face a tax charge where none was previously expected.

What is Inheritance Tax?

Inheritance Tax is charged at 40% on the value of an estate above the available tax-free thresholds.

Those thresholds currently stand at:

• £325,000 (the nil rate band); and
• £175,000 (the residence nil rate band), where a main residence is left to direct descendants

When combined and transferred between spouses or civil partners, this can allow up to £1 million to pass free of IHT in certain circumstances.

However, these thresholds have been frozen until at least April 2030, and in some cases beyond. As a result, rising property values and business asset values are bringing more estates within the scope of IHT each year — a process often referred to as “fiscal drag”.

The Role of BPR and APR in Estate Planning

BPR and APR are long-established reliefs designed to protect family businesses and farms from being broken up to meet an IHT liability.

Broadly speaking:

• BPR applies to qualifying business interests, including shares in private trading companies and partnership interests
• APR applies to agricultural land and property used for farming purposes

Historically, both reliefs could apply at 100%, meaning that qualifying assets were effectively removed from the taxable estate altogether.

For many families, this has been the cornerstone of succession planning.

The New £2.5 Million Cap on 100% Relief

From 6 April 2026, the position changes significantly.

Individuals will be entitled to 100% relief on combined BPR and APR assets up to a limit of £2.5 million. This is a cumulative cap, meaning it applies to the total value of qualifying business and agricultural property within an estate.

Once that threshold is exceeded, the rate of relief is reduced.

Assets above £2.5 million will only qualify for 50% relief, meaning that half of their value will be exposed to IHT at the standard rate of 40%. In effect, this creates a 20% tax charge on the excess.

This is a notable departure from the previous position, where there was no upper limit on the amount of property that could qualify for 100% relief.

A practical illustration

To put this into context, consider an estate that includes £4 million of qualifying business and agricultural assets.

Under the new rules:

• The first £2.5 million would benefit from 100% relief, resulting in no IHT
• The remaining £1.5 million would receive 50% relief, leaving £750,000 exposed to tax
• At 40%, this would give rise to an IHT liability of £300,000

For many business owners and landowners, this represents a significant shift in expected outcomes.

Position for Spouses and Civil Partners

The rules do, however, preserve the ability to transfer unused allowances between spouses and civil partners.

This means that where assets pass between spouses – either on death or through careful planning – any unused portion of the £2.5 million allowance can be transferred to the survivor. In practice, this allows a couple to benefit from up to £5 million of qualifying assets passing with 100% relief.

In addition, there is a helpful transitional provision. Where a spouse died before 6 April 2026, they are treated as having a full £2.5 million allowance available for transfer, regardless of the value of assets they actually held at the time.

Changes to AIM and Listed Shares

Another important development relates to shares listed on the Alternative Investment Market (AIM).

Historically, AIM shares have often been used in estate planning because they could qualify for 100% BPR after being held for two years, provided certain conditions were met.

From April 2026, this position changes:

• AIM shares will qualify for 50% relief only, regardless of value
• This creates an effective 20% IHT exposure on such holdings

For individuals who have invested in AIM portfolios specifically for IHT mitigation, this may require a reassessment of strategy.

Impact on Trusts

The new regime also has important implications for trusts holding business or agricultural property.

A similar £2.5 million cap on 100% relief will apply to relevant property trusts. In addition, trusts that were established before 30 October 2024 may benefit from their own separate allowance, which could create planning opportunities in some cases.

However, the changes are not entirely favourable.

Periodic (10-year) and exit charges – which apply to many trusts – will now be calculated by reference to the unrelieved value of the assets, rather than the value after applying BPR or APR. This means that, even where relief is available, the overall tax cost within a trust structure may increase.

Anti-Forestalling Measures

To prevent individuals from taking advantage of the period before April 2026, the legislation includes anti-forestalling rules.

In broad terms, gifts of business or agricultural property made between 30 October 2024 and 5 April 2026 will still be subject to the new rules if:

• The donor dies on or after 6 April 2026, and
• The gift falls within the usual seven-year period for lifetime transfers

This means that making gifts before April 2026 does not necessarily secure the current, more favourable treatment.

Instalment Payments and Cash Flow

One more positive aspect of the changes is the extension of the instalment payment regime.

Where IHT is payable on qualifying business or agricultural property, it can generally be paid in ten annual instalments. From April 2026, these instalments will be interest-free, which may ease the financial burden where estates are asset-rich but cash-poor.

Charitable Giving and Other Changes

The rules on charitable giving are also being tightened.

From April 2026, for an estate to benefit from IHT relief on charitable gifts, those gifts must be made directly to qualifying UK charities or amateur sports clubs. It will no longer be sufficient to leave assets to trustees with discretion as to how those funds are applied.

In addition, there is increased focus on overseas structures, with certain non-UK entities holding agricultural property potentially being brought within the scope of UK IHT. This may affect individuals who have historically used offshore arrangements as part of their planning.

Why These Changes Matter

Taken together, these reforms represent a significant shift in the IHT landscape.

While reliefs such as BPR and APR remain available, they are no longer unlimited. The introduction of a £2.5 million cap, combined with frozen tax thresholds and increased scrutiny, means that:

• More estates are likely to face an IHT liability
• Existing planning strategies may no longer achieve the same results
• Business owners and landowners may need to consider how any future tax liability will be funded

In particular, families who had assumed that business or agricultural assets would pass free of tax may now need to reassess that assumption.

What Should You Do?

Given the scale of these changes, it is sensible to review your position sooner rather than later.

This is particularly important if:

• The value of your business or agricultural assets exceeds, or is approaching, £2.5 million
• You hold AIM shares as part of your estate planning
• You have assets within a trust structure
• You are relying on BPR or APR to mitigate a potential IHT liability

Early advice can help identify potential risks and ensure that your estate planning remains aligned with your objectives.

How We Can Help

If you would like to discuss how these changes may affect your estate, business or succession plans, our Private Client team would be happy to assist.