The goalposts concerning inheritance tax reliefs — who gets them and how much they are worth — seem to be continually moving.
From April 2026 farmers and family firms will be the first hit by changes to the so-called death tax. Many farms and private companies benefit from two reliefs, agricultural property relief and business relief, but both are being cut.
The government expects the changes to bring in about £500 million a year from the 2027-28 tax year. Here’s how the system works, how it will change and whether you will be affected.
Inheritance tax is charged at a rate of 40 per cent on the value of your estate above £325,000, but this tax-free allowance rises to £500,000 if you pass your home to a direct descendant (a child or grandchild) as long as your estate is not worth more than £2 million.
Anything you leave to a spouse or civil partner is exempt from inheritance tax. They can also inherit your unused allowances so, in theory, couples can leave £1 million to their children tax-free.
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What is business relief?
Business relief, previously known as business property relief, was introduced in the 1970s to ensure that family-owned businesses did not have to be broken up or sold to pay an inheritance tax bill if someone died.
As it stands, you get business relief if you hold qualifying assets for at least two years and are still holding them when you die.
If you are a sole trader or partner in a business, then you get 100 per cent relief, so you can pass on the asset tax-free. If you have a controlling share in a listed company or you are passing on land, buildings or machinery used for the purposes of the business, then there is 50 per cent relief, so your beneficiaries will pay 20 per cent tax rather than 40 per cent.
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Business relief also applies to some shares that you may hold as an investment.
The rules are complex. The company must be engaged in continuing trade and not make most of its income “passively”, for example from investments or property sales. Some oil and mining companies do not qualify because some of their revenue comes from the sale of property assets.
What is agricultural property relief?
Agricultural property relief predominantly applies to farmers. As a general rule of thumb, any land or pasture that is used to grow crops or to rear animals can be passed on tax-free. Derelict buildings, farm equipment and machinery and livestock are not included (but farms may be able to use business relief on these assets instead).
Farmers get 100 per cent relief if they have either occupied and actively farmed the land for a minimum of two years, or owned the land for at least seven years if it has been farmed by another person. Most other farmers get 50 per cent relief.
You cannot claim business relief on an asset that you have already claimed agricultural relief on.
How is business and agricultural property relief changing?
From April 2026, the 100 per cent relief will be capped at £1 million for combined agricultural and business property.
This means that anyone inheriting a family business or farm will be able to inherit only £1 million of it tax-free — the rest will qualify for 50 per cent relief, giving an effective tax rate of 20 per cent instead of 40 per cent on assets above the limit. As with all assets, anything passed between spouses is tax-free.
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A business worth £3 million, which previously would have qualified for 100 per cent relief and could therefore be passed on completely free from inheritance tax, will only now be able to pass on £1.325 million tax-free (the £1 million of relief plus the £325,000 tax-free allowance given to every estate). The remaining £1.675 million will be taxed at 20 per cent: a tax bill of £335,000.
Unlike with other allowances, the £1 million cap on 100 per cent relief cannot be passed between spouses. This means it could be worth re-thinking your will in light of the changes, as if everything is passed between spouses then one person’s £1 million would be lost.
Any big change will have knock-on consequences for other parts of your financial plan, however, so make sure you speak to a financial adviser before making any drastic changes.
What can you do?
There are ways to lower your inheritance tax bill. Any gifts you give seven or more years before you die will be inheritance tax-free. This is known as the seven-year rule and effectively means that if you gave away your entire estate and then lived for seven years, your beneficiaries wouldn’t pay any inheritance tax.
For a gift to be a true gift, however, you must give up all access and benefits to the item. For example, you cannot give away your home to your children but live there rent-free, or give away an expensive piece of artwork but still display it in your living room.
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You also get yearly gift allowances, which means you can give £3,000 worth of gifts each tax year and this won’t be added to your estate. And you can give as many gifts of up to £250 per person each tax year (as long as you have not used another allowance on the same person).
You can also give as much as you like — and whenever you like — under the “normal expenditure out of income” exemption. This rule means that if you give a regular gift out of income, and losing that money does not lower your standard of living, then the gift could be exempt from inheritance tax.
Another option is to take out a life insurance policy to cover your expected tax bill. If this is written into a trust, then it sits outside your estate. When you die, the policy pays out and covers the tax bill. This can be expensive, as the premiums can be costly, but it can be a good solution if you do not want to gift just yet.
Trusts can come into play if you do not want to give up all control and ownership of the money that you want to move outside of your estate, but are complex and varied and can have a knock-on effect on your wider finances. Speak to a financial adviser and a solicitor before making any decisions.
A trust is a legal agreement that allows you to leave assets to your beneficiaries and move money outside of your estate while keeping some control and access.