Here’s what you need to know about new IHT
Joseph Slane takes a look at the nuts and bolts of inheritance tax changes
The UK government pledged to make considerable changes to inheritance tax (IHT), particularly agricultural property relief (APR) and business property relief (BPR), in its 2024 autumn budget. Over a year and another budget since, the details of these changes are close to being finalised in anticipation of the new tax year.
IHT is charged on the value of an individual’s estate on death (factoring in gifts made within the seven years prior). Every person has a “nil-rate band” (currently £325,000) which is applied against the value of their estate before IHT is charged at 40 per cent on the excess.
Reliefs and exemptions may be available to reduce the value of an individual’s estate for IHT, the most noteworthy of which is the exemption applicable to transfers between spouses and civil partners. Additionally, where an individual’s estate passes to their surviving spouse or civil partner free of IHT and their nil-rate band remains intact, the unused nil-rate band can be transferred to the survivor for use on the second death.
Looking back to 2024’s autumn budget, the headline-grabbing IHT policy announcement was that both APR and BPR would be restricted. Despite considerable protest, the policy remains largely intact and is set to come into full effect from 6 April 2026.
APR and BPR are applicable to certain agricultural or business assets which reduce their value for IHT purposes. APR and BPR can apply at 100 per cent in many cases, essentially removing qualifying assets from the scope of IHT.
From 6 April 2026, the extent to which agricultural and business assets may qualify for 100 per cent relief is to be capped. Originally, the cap was set at £1 million. However, following a government announcement last December, this is to be increased to £2.5m.
Where qualifying assets exceed the £2.5m threshold, relief on that excess value will be restricted to 50 per cent. For example, an individual’s shareholding in a family business valued at £3.5m would notionally qualify for 100 per cent relief to the extent of £2.5m. The excess £1m of value would qualify for 50 per cent relief, leaving £500,000 of value subject to IHT at 40 per cent (£200,000). This is before consideration of other reliefs, exemptions and nil rate bands.
Every individual will have a £2.5m “allowance” to utilise against qualifying agricultural and business assets. Following the original policy announcement, one consistent criticism was that an unused allowance would not be transferable between spouses and civil partners. Despite initial resistance, as part of the 2025 autumn budget the government backtracked and confirmed an individual’s unused allowance will be transferable. This means a couple will have a combined allowance of up to £5m to utilise following a second death.
Separate from the £2.5m allowance available to individuals, the government has confirmed trustees will have their own £2.5m allowance to apply where relevant trust assets are subject to IHT. Multiple trusts settled by the same individual on or after 30 October 2024 will share a proportion of the £2.5m allowance amongst them; however, trusts in existence prior to 30 October 2024 are deemed to have an allowance each.
While recent policy changes are welcome, the timing of the announcements is frustrating. It is hoped there will be no more significant changes prior to 6 April, but time will tell.
Joseph Slane is a Professional Support Lawyer, Turcan Connell