Business owners and agriculturalists might face a setback from inheritance tax; consider seeking a new will as a potential solution.
The UK government is introducing new inheritance tax (IHT) rules effective from April 2026, which will significantly impact family businesses and farmers with estates exceeding £1 million in qualifying assets.
The key change is the introduction of a £1 million combined allowance for business and agricultural property reliefs per individual. This means that each individual gets a £1 million allowance for qualifying business and agricultural assets, with 100% relief up to this limit.
However, assets exceeding £1 million attract only 50% relief, effectively a 20% IHT rate on the excess. This change represents a reduction in relief compared to current rules where 100% relief was uncapped, increasing inheritance tax bills for business owners and farmers with estates exceeding £1 million in qualifying assets.
One of the most significant implications of these changes is that the £1 million allowance is non-transferable. This means if a spouse does not use their full £1 million allowance, it cannot be added to the surviving spouse's allowance. For example, a couple with a family business worth £2 million will not benefit from a combined £2 million relief but rather two separate £1 million reliefs—one for each spouse.
If the surviving spouse inherits and then passes assets to children, the children only benefit from a £1 million allowance, not a combined £2 million, increasing their exposure to IHT.
The government has explicitly rejected making the £1 million allowance transferable between spouses or civil partners due to the fiscal cost.
These changes require careful lifetime and succession planning, and people are advised to check their will to make sure it's up to date and account for these imminent changes. Some business owners have started to put in place new measures to avoid inheritance tax or reduce their IHT bill, such as making a lifetime transfer of business assets to a spouse free of inheritance tax.
The new rules will apply a 100% inheritance tax relief on the first £1 million of combined agricultural and business assets. However, the relief cap creates challenges for subsequent generations. More details about the inheritance tax rules can be found in a separate article discussing ways to avoid inheritance tax.
The draft legislation does not align with the current rules for the inheritance tax nil rate band (NRB) and residence nil rate band (RNRB). Furthermore, from April 2027, pensions will be included in inheritance tax calculations, adding further complexity to an already complex system.
The changes may potentially penalize those who are not aware of the new rules, and the new rules will add substantial IHT risk on larger estates and complicate succession planning for family businesses and farms.
- In light of the updated inheritance tax (IHT) rules, comprehensive personal-finance planning is essential for family business owners and farmers with estates exceeding £1 million in qualifying assets, as the £1 million combined allowance for business and agricultural property reliefs is non-transferable.
- The UK government's decision to include pensions in inheritance tax calculations starting from April 2027 adds a layer of complexity to an already intricate system, potentially exposing larger estates to increased IHT and necessitating careful considerations in personal-finance management.
