Key Changes Now in Force
With effect from 6 April 2026, the Inheritance Tax (IHT) changes to Agricultural and Business Property Relief, now widely labelled the “Farmer’s Tax”, have come into force. Don’t be deceived, these changes apply to all businesses, not just farms. The Government’s rationale has centred on the value of assets owned and perceived fairness, with seemingly limited consideration given to wider commercial factors, including business continuity following an owner’s death, future investment decisions and the ability to maintain employment.
Under the new rules, the first £2.5 million of qualifying assets is free of IHT, the next 50% is also free of IHT, and the remaining 50% is subject to IHT at 40%. This gives an effective IHT rate of 20% payable on the value of qualifying assets in excess of £2.5 million. The only other good news is that the £2.5 million allowance is transferable between spouses and civil partners, where originally it was not.
Government press releases cite statistics indicating around 20% of affected estates will now pay more IHT as a result of the changes. While this appears reassuring, it masks an important practical issue, the relevant reliefs are not automatic and must be actively claimed. As a result, all estates which own businesses will need to obtain valuations to demonstrate that the value of the business falls within the available allowance or agree the taxable value where it does not.
Depending on the nature of the business, this will involve complex valuations of property, business assets, value of contracts, goodwill and other intangible assets. Such valuations are highly specialist and often costly, which must be completed and paid before executors are able to complete an IHT return, or obtain Confirmation. For estates where IHT is payable, reaching agreement on values can introduce significant delays. Executors also remain personally liable for the tax, and although IHT payable on business assets may be paid by instalments over 10 years, professional advice is likely to discourage the transfer of assets to beneficiaries until the liability has been fully settled. This raises a fundamental question that remains unanswered: how is a business owner expected to operate their business without ownership of its underlying assets?
The Government acknowledges that careful estate planning, typically through gifting or trusts arrangements, can reduce IHT exposure, provided the individual survives seven years. However, this risks diverting attention from the primary purpose of businesses which is to create employment, produce goods and services, pay taxes and ultimately generate wealth for the business owners and the wider economy.
Planning Ahead for Further IHT Changes
Further reforms to IHT are scheduled for April 2027, when pensions with a monetary value on death will fall within the scope of IHT. While there is a conceptual rationale for taxing pensions on death, a strong argument exists that they should be subject to either IHT or Income Tax, but not both. The proposed framework is technically complex and is expected to introduce significant additional risk for executors, alongside increased administrative costs. These concerns are not limited to practitioners as the House of Lords Economic Affairs Committee, in its report of 28 January 2026, raised similar concerns, many of which were subsequently rejected by the Treasury.
With the new rules now in effect, it is important for business owners and their advisers to assess how the changes affect their particular circumstances. With further reforms scheduled, including changes to the treatment of pensions from April 2027, early review and informed planning will be key to managing risk, cost and uncertainty in an increasingly complex IHT landscape.
