The Autumn Budget introduced some significant Inheritance Tax (IHT) changes that may heavily impact farmers, business owners, and wealthier individuals.
From April 2026, IHT relief for business and agricultural property will be limited to £1 million at 100 per cent, with assets above this threshold only qualifying for 50 per cent relief, potentially creating a 20 per cent effective tax rate on death.
Additionally, unused pension funds will (once again) be subject to IHT from April 2027.
We think these reforms will drive more succession planning and lifetime gifting as business owners seek ways to transfer wealth earlier to minimise IHT liabilities.
However, it should be noted that professional advice is likely going to be necessary to avoid potential Capital Gains Tax (CGT) mistakes.
How could the IHT changes impact local farmers?
Under current rules, a farmer may be able to leave agricultural land, outbuildings, and even the farmhouse to beneficiaries (e.g. their children or grandchildren) with no IHT to pay.
This is due to Agricultural Relief (AR) and Business Relief (BR), which together can remove up to 100 per cent of the value of the farm from the taxable estate.
There is currently NO limit on the value of assets that may qualify for this purpose.
Any part of the taxable estate that is not covered by the nil rate band/ main residence nil rate band is normally charged to IHT at a rate of 40 per cent.
With effect from April 2026, however, only the first £1 million of agricultural and business assets will attract 100 per cent relief – any value above that amount will attract only 50 per cent relief.
For example:
- Farmland with a value of £2 million might have no value at all for IHT purposes in a death estate at the moment and therefore be subject to no IHT at all on death.
- The same farmland in an estate from April 2026 onwards could have a value of £500,000 (£2 million total value, of which £1 million relieved at 100 per cent and £1 million relieved at 50 per cent, leaving £500,000), and therefore be subject to IHT of up to £200,000 (£500,000 x 40 per cent).
Anyone who is concerned about the potential impact of the new rules should contact their tax adviser to review the position.
Such a review would typically be wide-ranging, encompassing the assets and debts of the business, clarifying/confirming asset ownership, discussing the owner’s intentions and plans for the future, family circumstances etc, and reviewing the suitability of existing succession/ estate planning arrangements.
For farms of significant value, the proposed changes are likely to drive an increase in lifetime gifting i.e. a move away from the widespread ‘hold until death’ approach that (until now) has often been seen as a tax-effective approach to succession.
We are also likely to see many existing wills being redrawn, because the new £1 million limit will not be transferrable to a surviving spouse.
Rather than the entire farm estate being left to a surviving spouse (to be handed down to the next generation on the ‘second death’), in future we are likely to see more arrangements that pass some of the farming assets down on the ‘first death’.
In this way farming couples can potentially benefit from the new £1 million AR/ BR limit twice, saving up to £200,000 in the process.
With that said, here are some of my suggestions for practical solutions that may help you mitigate the CGT and IHT implications of the Budget.
Accelerate asset transfers to family members
Given the new £1 million cap on 100 per cent relief for business and agricultural property, consider transferring assets to family members sooner rather than later.
Transferring assets during your lifetime can help shield them from IHT, provided you survive for at least seven years after the gift – the Seven Year Rule.
Transferring assets also allows you to benefit from the current, more generous reliefs before they change in April 2026.
However, keep in mind that CGT could arise on certain asset transfers, so it's essential to discuss with a tax adviser an approach that will minimise exposure to both IHT and CGT liabilities.
Establish trusts to manage your wealth
Trusts can be an effective tool for managing IHT, particularly for those looking to transfer wealth to the next generation without immediate ownership transfer.
While trust structures do come with their own tax implications, they can offer some protection against IHT, and when correctly structured, they allow you to retain some control over assets.
For example, placing business or agricultural assets in trust for future beneficiaries could reduce the taxable estate and spread out your potential tax liabilities.
Each trust type has different benefits, so consult an adviser to determine the most effective strategy based on your circumstances.
Review pension plans and withdraw lump sums strategically
With pension funds set to become part of an individual’s taxable estate again from April 2027, reviewing your pension plan now can be beneficial.
For those with substantial pension assets, withdrawing the Tax-Free Lump Sum or even taking advantage of flexible pension drawdowns can allow you to transfer funds outside the estate, either through gifting or other investments.
Consider withdrawing funds you don’t intend to rely on in retirement to gift or invest tax-efficiently, as this approach could help reduce the eventual IHT charge on your estate.
Make the most of your lifetime gifting allowances
In light of the changes, lifetime gifting is likely to become more popular, taking advantage of current allowances and exemptions where possible.
The annual exemption of £3,000 per person, per year, can add up over time, while the larger exemption for wedding gifts and gifts to dependents can further reduce taxable estate value.
Potentially the most valuable lifetime gifting exemption of all is the ‘gifts out of normal income’ rule. Gifts that form part of an individual’s normal expenditure; that are made out of their income; and that leave the transferor with enough income to maintain their normal standard of living; may be made entirely IHT free. Now that pensions are once again subject to IHT, we can probably expect to see wider and more extensive use of this exemption among wealthier retirees.
Gifts within the exemptions remain outside the estate immediately, and any gifts to individuals exceeding the statutory limits fall out of the estate after seven years.
For business owners, careful structuring of asset transfers can mitigate CGT implications and spread out your liabilities.
Consider CGT mitigation strategies for asset transfers
If you’re considering transferring business or investment assets to family members, CGT could be triggered on the increase in asset value since purchase.
Speak to a tax adviser before transferring the ownership of any business, property, or other investment assets. CGT reliefs including Gift Holdover Relief may be available depending on the circumstances and the asset being transferred. A suitably qualified tax adviser will be able to identify and quantify potential CGT exposures and advise on appropriate tax mitigation strategies, including available reliefs and exemptions.
Use life insurance to cover potential IHT liabilities
For those with larger estates or business holdings, a life insurance policy specifically designed to cover IHT liabilities on death could be a valuable tool.
These policies can help to protect the next generation from sudden, high IHT bills, particularly in light of the relief changes.
By ensuring the policy is held in trust, the payout may not be subject to IHT, offering a buffer against tax liabilities for beneficiaries and providing greater flexibility with estate planning.
Each of these strategies can help mitigate both IHT and CGT liabilities, but with the complex interaction of these taxes, personalised advice should always be sought.
A professional tax adviser can help tailor your strategy based on your unique circumstances, ensuring you maximise tax efficiency in light of these upcoming changes.
