The April 2026 changes to Agricultural and Business Property Relief

In the Labour Government’s first Budget, held on 30 October 2024, significant reforms of Agricultural Property Relief (APR) and Business Property Relief (BPR) from inheritance tax (IHT) were announced. A short accompanying paper was released on the day. However, a consultation (to be held in early 2025) will contain further detail, particularly regarding the application of the reforms to trusts. The consultation should also present opportunity for industry bodies to provide feedback on the reforms and it is possible that we may see some changes before the final legislation.

In this note, we consider the information currently available regarding the proposed reforms and make some comments on potential planning points and wider implications of the reforms.

Current position – APR 

APR currently applies in priority to BPR.  It applies to “agricultural property” which includes:

• agricultural land or pasture (including land used for stud farms);
• woodlands occupied with, and ancillary to, agricultural land or pasture;
• buildings used in connection with the intensive rearing of livestock or fish so long as the building is occupied with, and ancillary to, agricultural land or pasture; and
• cottages, farm buildings and farmhouses, together with the land occupied with them, as are character appropriate to the property.  This limb is the subject of much case law in respect of what constitutes “character appropriate”.

In order for APR to apply, there are also occupation and ownership conditions which have to be met. Either:

• the agricultural property needs to have been occupied by the taxpayer for the purposes of agriculture throughout the two years ending on the tax event; or
• it must have been owned by him throughout the seven years ending with the date and was throughout that period occupied by him or another for the purposes of agriculture.

The first condition tends to apply to in-hand land, whereas the second tends to apply to let land.

There are two rates of APR. 100% APR applies most typically where the taxpayer has the right to vacant possession or can obtain it within twelve months, or where the property is let on a post 1 September 1995 farm business tenancy (FBT). 100% relief can also apply (under an extra statutory concession) to land subject to older Agricultural Holdings Act (AHA) where vacant possession will be obtained within 24 months or where, due to a close nexus between the landlord and tenant, the freehold is valued at an amount broadly equivalent to the vacant possession valuation of the property.

APR at 50% is available in all other cases. This tends to apply to land subject to AHA tenancies.

APR works by reducing the value of the agricultural property which is transferred on a tax event. For example:

Tom owns a farm with an open market value of £15m, the agricultural value of which is £12m. The remainder of the value is due to amenity valuation and development potential.  Tom farms the land in-hand. APR at 100% will apply to the agricultural value of £12m.  This will reduce the agricultural value of this land to nil and, on any tax event involving the transfer of the farm (eg a death or gift) the value transferred will be treated as £3m.

If instead Tom were the landlord and let his land on an AHA, the agricultural value of £12m would gain 50% relief and be reduced to £6m. On a transfer of the farm, the total value transferred would therefore be £9m.

Current position – BPR

BPR applies to interests in trading businesses. It can apply to a sole trade, partnership interest or shares in a company.  

The relief applies to the full value of the business, other than to any excepted assets (ie assets owned by the business but not used in the trade).

The business must be wholly or mainly trading.  This means more than 50% trading.  The business must have been owned by the taxpayer for a period of two years prior to the tax event.

As with APR, there are two rates. 50% BPR applies to:

• quoted shares or securities which give the taxpayer control;
• land, buildings, machinery or plant either used in a business which the taxpayer controls, or in a partnership of which he is a partner; and
• land, buildings, machinery or plant which were held on a life interest trust and used in the business of the life tenant.

Otherwise the rate of BPR is 100%.

Balfour and Landed Estates

BPR is a wider and more generous form of relief which can, if proper structuring is used, fill the “gaps” not covered by APR. A classic example of this is Balfour structuring often used by Landed Estates.

A typical Landed Estate might comprise, for example, agricultural property and buildings (a mix of in-hand and some FBTs), a few holiday lets, a couple of commercial buildings and some woodlands (commercially exploited in-hand).  

Looked at separately the assets would benefit from the following reliefs:

• Agricultural property and buildings – 100% APR on the agricultural value.
• Holiday lets – no relief.
• Commercial buildings – no relief.
• Woodlands – 100% BPR.

If, for example, a partnership were formed over all the assets, so long as overall business remained “mainly trading” (and there are various tests to establish this), the position could be improved as follows:

• Agricultural property and buildings – 100% APR on the agricultural value and 100% BPR on any additional “excess” value.
• Holiday lets – 100% BPR.
• Commercial buildings – 100% BPR.
• Woodlands – 100% BPR.

Unsurprisingly, therefore, many Estates have sought to implement Balfour structuring in order to secure BPR on assets which would otherwise not qualify for relief. This has also fuelled, in part, the movement in the sector towards diversification as Estates have sought to boost their trading elements.  

Changes announced in the Budget

The Budget announced a change to the taxation of “shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM was announced. The phrasing of this reform in the initial briefing was unclear and, read at face value, would also include unlisted shares. However, it is understood that a Treasury spokesperson has since confirmed that the change only applies to shares which are quoted, but on markets which are not recognised stock exchanges (such as AIM). In effect, this would mean listed shares (whether on a recognised stock exchange or not) will be able to benefit from 50% BPR (although it seems likely that those listed on recognised stock exchange will still need to represent a controlling interest) whereas unquoted shares, subject to the cap discussed below, will continue to benefit from 100% BPR.  

It is helpful to think of assets which currently benefit from 50% APR or BPR, plus quoted shares on non-recognised stock exchanges, as Formerly 50% Relieved Assets, and for assets which currently benefit from 100% APR or BPR (other than quoted shares on non-recognised stock exchanges) as Formerly 100% Relieved Assets.

Impact on individuals

The Budget did not affect how APR and BPR will apply to Formerly 50% Relieved Assets.

Instead, the reforms announced in the Budget affect Formerly 100% Relieved Assets.  A new £1m allowance will apply to Formerly 100% Relieved Assets. Within this allowance, these assets will continue to benefit from 100% relief. However, above the allowance they will only benefit from 50% relief. Formerly 50% Relieved Assets will not count towards the allowance.  

The £1m allowance will be pro-rated as between agricultural and business property. This is different to the current rules where APR takes priority to BPR. It remains to be seen what impact this may have in practice. 

The allowance is not transferable between spouses.

The allowance will apply to all IHT transfers - so transfers in lifetime and on death.  Although not expressly stated in the briefing, it seems most likely that this allowance will be a lifetime allowance (ie there will be one £1m allowance which can be used either in lifetime or on death (or a mix), and it will not refresh unlike the nil rate band which refreshes every seven years). 

Broadly, speaking, the effect of the reforms will mean that on or after 6 April 2026:

• Formerly 100% Relieved Assets held at death will, after deduction of the nil rate band, £1m allowance, and spouse or charitable exemption, be subject to an effective marginal IHT rate of 20%. This rate will also apply to outright gifts (potentially exempt transfers) which are made less than seven years prior to the death, subject to taper relief. (Taper relief applies to reduce the rate of tax on death if a gift is survived by more than three years, but less than seven years.)
• Formerly 100% Relieved Assets settled into trust will, after deduction of the nil rate band and £1m allowance, be subject to an effective marginal IHT rate of 10%, with up to another 10% becoming due should the settlor fail to survive the gift by seven years. 10% assumes that the trustees pay the tax from the settled assets; the rate is increased to just over 11% if the settlor pays the tax due to the principle of “grossing up”.

Impact on trusts

Two main IHT regimes apply to trusts. Some trusts are subject to the “beneficiary” regime which means that IHT is payable on the beneficiary’s death. The briefing note did not discuss these sorts of trusts. Under the IHT regime, the beneficiary is treated as owning the trust assets and therefore these assets are aggregated with their personally owned assets when calculating the IHT due on their death. One might assume therefore that in these circumstances there is one £1m allowance which is, under some mechanism, apportioned across the trusts and personal assets. 

The briefing note did address trusts subject instead to the relevant property regime which applies IHT charges on the 10 year anniversary of a trust and when assets leave the trust. The new £1m allowance will also be available to relevant property regime trusts. There will be a technical consultation in early 2025 as to how this will work. However, the details to date are that:

• Trusts settled before 30 October 2024 will have their own £1m allowance.
• Trusts settled on or after 30 October 2024 which share a settlor will share a £1m allowance (much like such trusts currently share capital gains tax (CGT) annual exemptions).

Accordingly, Formerly 100% Relieved Assets in excess of the trust’s nil rate band and £1m allowance will, on or after 6 April 2026, be subject to an effective marginal IHT rate of 3% on 10 year anniversaries.  

Anti-forestalling rules

Anti-forestalling rules were announced which will affect gifts into trust or outright to another individual made on or after 30 October 2024 and before 6 April 2026. In these cases, the new rules will apply if the donor dies within seven years and on or after 6 April 2026. Although not expressly stated, it might be concluded from the introduction of the anti-forestalling rules that gifts made prior to 30 October 2024 where the donor dies within seven years will be assessed under the current, more generous, regime, even if the death occurs on or after 6 April 2026. Express confirmation of this point will be welcomed by taxpayers and their advisers though.

Impact of the reforms – some examples

Some examples of the impact of the reformed reliefs:

Annette and Ben are mother and son and farm in partnership. Their partnership is a composite business with farmland, woodlands, some commercial properties and some let properties and is mainly trading. The partnership is worth £20m, of which £10m forms part of Annette's estate. Annette has used her nil rate band. 

Under the current rules, Annette would benefit from 100% relief on her death and the £10m would be inherited free of IHT.

Under the new rules, the first £1m of Annette's partnership interest will benefit from 100% relief. The remaining £9m will only benefit from 50% relief and so a value of £4.5m will be chargeable at 40% = £1.8m of IHT. It will be possible for this to be paid in instalments over 10 years, and interest relief should apply (with the result that there will be no interest payable unless an instalment is paid late).  

Catherine is the main beneficiary of her family's Landed Estate. The in-hand farmland is owned across three trusts (all of which established long before 2024) and Catherine personally. Catherine's interest in the trusts mean that they form part of her estate for IHT purposes. On Catherine's death, under the current regime, the value of the farmland would have received 100% APR. It is presently unclear under the new regime how many £1m allowances might be available on Catherine’s death. The working presumption is only one, and therefore the first £1m of the combined value of the trust and personally owned farmland will benefit from 100% relief and the balance will only get 50% relief.   

Let us, however, assume that the trusts continue after Catherine’s death and enter the relevant property regime; moreover the farmland passing under Catherine’s Will passes into a relevant property regime trust. On the briefings provided to date, it seems that each trust will have its own £1m allowances. Therefore, following Catherine’s death, between all four trusts, £4m of farmland will benefit from 100% relief and the balance will get 50% relief.

A new dynamic

Under current legislation, there is no tax benefit to making gifts during lifetime of business or agricultural assets. Indeed, there has been a CGT benefit to holding them until death. On death, the assets have passed relieved from IHT, and rebased (ie all historic gains wiped out) for CGT purposes. This double-benefit has often been criticised either as too generous, or for disincentivising lifetime gifts.

The new regime creates a significant shift in these dynamics.  This is best illustrated by looking at the possible IHT outcomes of three options:

1. Holding assets until death will now result in an effective IHT charge of 20% on business or agricultural assets exceeding the £1m allowance and any nil rate band.  BPR will continue to be the more comprehensive or attractive relief, for a number of reasons. Assets will continue to be rebased for CGT.
2. Making an outright gift during lifetime will result in the same outcome as the treatment on death if the donor dies within seven years (although tapering of the tax after three years remains). However, if the donor survives seven years, there will be no IHT. Capital gains can often be heldover on gifts of agricultural and business assets, meaning that although the gains remain capable of being brought into charge at a future date, no charge is triggered on the gift itself.
3. Making a gift into trust during lifetime will result in an upfront effective IHT charge of 10% on business or agricultural assets over £1m.  Any gains can be heldover. If the donor survives the gift by seven years, no further IHT will become due. If they die within seven years, another 10% IHT will be due on the value in excess over £1m, making the end result the same as under scenario 1. (10% assumes that the trustees pay the tax from the settled assets; the rate is increased to just over 11% if the settlor pays)

Clearly, then, farmers and business owners are now incentivised to make lifetime gifts as the potential prize should they survive seven years is much better than paying 20% on the value over £1m and any nil rate band should they continue to own the assets until death. Outright gifts are most attractive as this should avoid IHT altogether if the gift is survived by seven years.  

Trusts for these assets will become less attractive, with (after April 2026, subject to what the consultation proposes) a 10% entry charge for those who want to benefit from the longer-term protection offered by trusts (which are well suited to holding multi-generational assets), as well as an effective 3% charge every 10 years on agricultural and business assets.  

Giving into trust or outright will only work for IHT purposes where the donor can afford not to retain any benefit in the asset given away; hence much of the concern about the impact on smaller and medium sized farms and businesses, where this will be more difficult.

Under the new regime, there are going to be a lot of conversations about succession. Whereas to date, it has not been a priority to hand-on relieved assets, now it is likely to be a regular agenda item. The sensitivities of these conversations, given family dynamics and the emotional and financial importance of these core assets, will mean this (potentially recurring agenda items) will need to be approached with care. Clearly one does not want to give away assets to avoid tax but introduce other forms of risk into the equation.

Planning points

Lifetime gifts

As explained above, generally speaking, the new regime will encourage outright gifts of APR and BPR assets.  

However, where a taxpayer is elderly, and may not be expected to live beyond 6 April 2026, the best approach would be for them to retain their agricultural and business assets and benefit from the more generous IHT regime, and CGT rebasing.  

There is a very difficult choice for older business and agricultural owners whose life expectancy is less certain. Should they survive until 6 April 2026, the new (less generous) regime will apply. Lifetime gifting should be considered, although this will only be successful if survived by seven years. Term life assurance might be an option to cover this risk, although this may be prohibitively expensive for older donors.   

Younger taxpayers will want to consider planned lifetime succession as discussed in the previous paragraph.

Married couples

Once the reform has been brought in, a married couple will, between them, be able to leave £2.65m free of IHT (representing two APR/BPR £1m allowances and two nil rate bands of £325,000). If either of their estates were valued under £2m on their respective deaths, a further £350,000 of residence nil rate band (RNRB) may be available.  However, when assessing whether the £2m threshold is crossed, the estate is valued before the application of reliefs or exemptions. Therefore, for most, farmers and business owners, it is likely that this threshold will be exceeded and the RNRB will not be available, particularly once pensions are brought within the scope of IHT from 6 April 2025.

The Government’s briefing confirmed that the new £1m allowance will not be transferable between spouses (unlike the nil rate band and RNRB). Therefore, couples should take advice to ensure that the ownership of the assets is appropriately divided between them, and that they have suitably sophisticated Wills in place, to enable each £1m allowance to be used on each of the deaths.

Individuals who have Wills with business / agricultural property gifts within them ought to have them reviewed in order to ensure that the previous formulations will work under the new regime.

Recently widowed farmers and business owners

Farmers and business owners who have been widowed within the last two years, or are widowed between now and 6 April 2026, should take advice on whether action should be taken in respect of their late spouse’s estate. Where the deceased spouse owned an interest in the farm or business, (subject to the commercial implications) for tax-planning purposes this interest should be “diverted” away from the surviving spouse, for example into a suitable trust. This will (i) ensure that APR and BPR are “banked” under the prevailing more generous regime and (ii) avoid assets passing into the spouse’s estate which will be subject to a less generous regime in due course.  

Post-death planning will continue to be important post 6 April 2026 to ensure at the first to die’s £1m allowance is used where appropriate structuring was not put in place pre-death.

Pre-existing trusts

Pause for thought should be taken before winding up historic (pre 30 October 2024) trusts. These trusts could benefit from their own £1m allowances once within the relevant property regime and so it may be better to keep them going with a view to moving APR or BPR assets into them in order to maximise available allowances (see the example involving Catherine above).

New trusts

There is a window of opportunity until 6 April 2026 to settle APR and BPR assets into trust, and not trigger an upfront IHT charge should the settlor survive seven years. On or after 6 April 2026, placing assets into trust will trigger an upfront charge of 10%, with a further 10% becoming due should the settlor die within seven years. (10% also assumes that the trustees pay the tax from the settled assets; the rate is increased to just over 11% in each instance if the settlor pays).

Planning for charges

Trusts which hold APR and BPR assets will also need to consider how they intend to meet the IHT which may now arise on those assets. This may be a particular concern for trusts within the relevant property regime (which applies charges every 10 years) where life assurance will not be an option. They may need to change the trust, or apply to Court, in order to enable them to use income to meet this charge, in order to avoid selling the assets. The interest-free instalment option (which enables any IHT to be paid over 10 years in equal instalments) will assist with cashflow planning.

The future of Balfour planning

Balfour planning will remain important, but will no longer have the benefits it once had. Whereas previously investment assets, or the value of agricultural property in excess of agricultural value, within a Balfour structure would benefit from 100% relief, they will now only benefit from 50% relief (assuming that the £1m allowance has already been used elsewhere on an Estate).

Value fragmentation

Over the last generation, the focus on IHT planning for Landed Estates has been to maximise APR and BPR at 100%. The proposed changes will represent a dramatic change to traditional Landed Estate structuring given the 100% prize is no longer available.

It is likely that more creative planning will become common; most likely that which focuses on value fragmentation. Examples include reversionary lease schemes which had their hey-day in the 1990s; the application of these are now largely limited to trusts following legislative changes to counter this planning for personally owned assets.  

Although companies have not been traditional holding vehicles for Landed Estates, we may see an uptick in interest in these structures because it opens up possibilities for introducing discounts. However, any major restructurings will need to be considered carefully.  Upfront costs might be significant. Fragmentation of ownership gives rise to concerns about control and management. There is also a risk that popular planning techniques might be subject to future statutory changes.

Other implications of the reforms

Life assurance

The Budget changes are likely to represent a boon for the life assurance industry. Where succession cannot take place during lifetime, life assurance may be a solution to help meet the IHT on death. Term assurance will be important to cover the risk of a death within seven years on lifetime gifts. 

Implications for AHAs

Since 1995, it has been a common planning point for landowners to either take land “in-hand” or to replace AHAs with farm business tenancies in order to benefit from 100% APR on the freehold value of the land, rather than 50% APR. Replacing AHAs with in-hand arrangements also unlocked BPR on the land in question.

It is unlikely that replacing AHAs will be beneficial under the new regime. Assuming the landowner has other assets in excess of £1m which fall into the Formerly 100% Relieved Assets category, there will be no benefit to replacing the AHA because either way the freehold value will only benefit from 50% APR.

Indeed, maintaining the AHA will be beneficial from a tax perspective because it will depress the valuation of the freehold.

Diversification and Environmental Land Management Schemes

The restriction of APR and BPR on Formerly 100% Relieved Assets will reduce the IHT benefits to starting new trading enterprises.  From 6 April 2025, land in Environmental Land Management Schemes will be treated as used for agricultural purposes for APR. However, from 6 April 2026, this only opens the door to 50% APR on these assets to the extent they exceed the £1m allowance.

The commercial cost-benefit-risk analysis of these enterprises will shift as a result of the new IHT reform, and increase in National Insurance Contributions. This may result in less uptake of these schemes and diversification efforts. It is therefore possible that the new regime will herald a period of less inward-investment into Landed Estates, perhaps with an increased focus on building up a “war chest” to meet IHT in the future (eg through funding life assurance, or building up an investment portfolio).  

Conditional exemption

Conditional exemption from IHT has traditionally been seen as the exemption of last resort where APR and BPR does not apply. It can be claimed in respect of land which is of outstanding scenic, historic or scientific interest.  

Conditional exemption is a deferral mechanism, enabling the IHT which would otherwise be due on a tax event to be deferred until a later date. The exemption is granted subject to undertakings (which are effectively conditions) requiring, most importantly, public access to the exempted land. The deferred tax will become due if the undertakings are broken (eg by denying public access), or land sold. The calculation is complicated and depends on the event from which tax was deferred. However, where the tax was deferred on a death, the deferred rate is applied to the market value of the asset when the tax becomes due.  

For example, say Daniel owns farmland worth £20m. On his death, IHT of £3.8m is due (Daniel has no nil rate band available). This is calculated at 40% of £19m x 50% APR relief.  Daniel’s executors and beneficiaries make a claim from conditional exemption and no IHT is paid at that time.

In due course, Daniel’s family decides they wish to sell the land and pay the IHT. However, it is very important to note that APR (or indeed BPR) cannot be used to reduce the value for tax at that time. Therefore, IHT at the deferred rate of IHT (40%) will be due on the market value of the land at that time. If it worth £30m, IHT of £12m will be due. Daniel’s executors and beneficiaries would therefore need to be very sure that they were happy to retain the land, and keep the undertakings, before entering into the conditional exemption regime, otherwise the ultimate tax burden could be much higher than that which they sought to defer initially.

Land values

Finally, it is possible that agricultural land values will fall in response to the reformed reliefs. A concern of the Government has been that values have been inflated by investors seeking to invest in agricultural land as an IHT-relieved asset class. If this is correct, and demand falls, one may also expect land values to fall which may go some way to mitigating the higher IHT charges post 6 April 2026.

If land values have fallen, taxpayers will wish to consider their CGT position and whether, if assets are standing at a loss (or more modest gain), they would prefer to make lifetime gifts at the depressed value, rather than hold assets until death where the CGT rebasing provisions will rebase the property to a lower value.