Budget Watch: Inheritance Tax Update – Headlines for Business Owners and Farmers
Posted on in Tax, Trusts & Succession
The Chancellor has announced an important and welcome change to the inheritance tax (IHT) regime: the £1 million allowance of 100% relief from inheritance tax for qualifying businesses and agricultural property will now be transferable between spouses and civil partners.
This represents a significant shift in how these reliefs can be used, and for many families with business or agricultural property, it may provide much-needed reassurance that valuable reliefs will not be inadvertently lost.
This brings the new business and agricultural relief regime in line with the existing treatment of personal inheritance tax free allowances and residence allowance from inheritance tax.
The rules announced last year introduced a cap on the value of assets which could secure full business or agricultural relief from inheritance tax. As announced last year, the new rules would have meant that, effective from 6 April 2026, every owner of a qualifying business or farm could only leave assets worth up to £1 million free from inheritance tax.
Each member of a married couple was to have their own £1 million allowance, bringing the total business or agricultural relief available between them to £2 million. However, the £1 million allowance had to be used on death, or it would be lost.
This would have meant that, if a married couple owned a business worth £2 million in total, its full value could be protected from a charge to IHT only if appropriate planning steps were taken in advance.
Most couples who wished to leave their estate to each other on death and then on to their children on the second death would not have secured the full £2 million of 100% relief without putting complex structures in place in their Wills. This is because:
- On the first death in a married couple, if a wife passed her half share of a qualifying business, worth £1 million, to her husband on death, that would be covered by spouse relief from inheritance tax, so that no IHT would be due.
- On the second death, if the husband then passed the full business, including his wife’s share, to their children, so that a business worth £2 million was passed on at that stage, the husband would only have been able to apply his £1 million 100% allowance to protect the value of the business passing to his children. The rest of the business would only receive 50% protection from inheritance tax, so that an inheritance tax charge would arise.
This is because the wife’s 100% inheritance tax allowance of £1 million would have been lost as it was not used on her death.
The Chancellor’s announcement changes this.
Now, when the rules take effect from April 2026, the first spouse to die will be able to transfer the benefit of any unused 100% relief to the estate of their surviving spouse. If the 100% allowance is not used on the first death, this change will enable both the wife’s and the husband’s 100% £1 million allowances (totalling £2 million) to be claimed on the death of the surviving spouse.
Whilst this is an important and positive reform, it does not go as far as some had hoped. The £1 million cap on full relief from inheritance tax for qualifying business and agricultural assets remains in place and will come into force fully, as planned, from April 2026. Qualifying business and agricultural assets which are not covered by the £1 million relief will instead receive 50% relief from inheritance tax. This is expected to be a significant difficulty for many business and farm owners, and positive inheritance tax planning steps should be taken to manage or eliminate the inheritance tax liability arising.
From April 2031, the £1 million allowance for 100% relief on qualifying agricultural and business property will be adjusted in line with the Consumer Price Index. The main IHT allowances will also remain frozen until April 2031. This means that the value covered by 100% business or agricultural relief, as well as the standard inheritance tax-free allowance of £325,000 and the residence allowance of £175,000, will not rise with inflation.
For many families, although the structure of relief for business and agricultural assets has become more generous, the wider IHT position remains tight. As property values, pensions, and investment portfolios increase, more estates may exceed the available thresholds simply due to rising asset values and frozen allowances.
Helpful measures relating to the collection of IHT due from pension arrangements were also announced. Personal representatives will be able to direct pension scheme administrators to withhold half of the taxable pension benefits for up to 15 months and to pay IHT due in certain circumstances. Personal liability for the inheritance tax due on pension funds will also be removed from personal representatives once the Revenue has confirmed that they have received the tax due. This removes a significant element of potential risk for personal representatives.
The Chancellor has signalled that restrictions will be introduced in relation to charitable gifts during life and on death. This will be addressed in the Finance Bill 2025-26, but no further information is currently available.
How can we help
If you think this change may affect your estate planning, or if you simply wish to understand how your allowances now operate, please contact our specialist Tax, Trusts and Succession team for tailored guidance.