Inheritance tax reform: what it means for landowners and succession planning

Insight

31.07.2025

The Chancellor of the Exchequer announced sweeping changes to Inheritance Tax (IHT) in her Budget statement on 30 October 2024. Landowners were told that from 6 April 2026 onwards, 100% Agricultural Relief (APR) and Business Relief (BPR) will be subject to a £1 million cap, with all remaining value subject to relief at 50%. Since then, we have had only supplementary announcements from the Government and a consultation on how the new rules will apply to trusts. On 21 July 2025, the Government published draft legislation that will give effect to its reforms, and we now know more about how the new rules will apply in practice.

In a previous briefing, we explained that the new regime presents challenges, but also opportunities (some time-limited), for landowners. The draft legislation now gives further colour to those initial observations.

What will change?

The draft legislation contains few surprises. Despite pressure from landowners, farming communities, and family business owners, the government has not conceded on the principles that it outlined in the Budget. The legislation is of course subject to parliamentary approval and may be amended as it moves through the House of Commons and the House of Lords, but we expect the broad outlines of the new regime to remain as announced.

In summary:

£1 million allowance for 100% relief: From 6 April 2026, only the first £1 million of qualifying agricultural and business property will get APR and BPR in full. Any qualifying property worth more than £1 million will be taxed to IHT at half the usual rate. That means an effective IHT rate of 20% for transfers on death and up to 3% on capital leaving trusts or on the trust’s 10-year anniversary.
Inflation-adjustment (possibly): The £1 million allowance will in the future be adjusted for inflation, using the Consumer Price Index, with the aim of preserving the real value of the allowance over time. The amount will however be fixed at £1 million until 5 April 2030, increasing for the 2030/31 tax year. Freezing the value of the allowance until 2030 is in line with the government’s decision to freeze other IHT allowances (including the nil rate band) until the same date. Increasing the allowance will require further legislation. The nil rate band has of course remained unadjusted since 2009, so it is wise to be sceptical about whether the allowance will really be up-rated as planned.
Using the £1 million allowance in practice: For individuals, the £1 million allowance qualifying for full relief will renew every seven years. This means that gifts of qualifying property (including gifts into trust) can be made on a rolling seven-year basis, in the same way as the nil rate band is used currently. If someone dies having made gifts using their allowance more than seven years ago (without reserving any benefit in the gifted property), their £1 million allowance will have been replenished and will be available on death. However, unlike the nil rate band, the £1 million allowance will not be transferable between spouses or civil partners. Each individual will have their own £1 million allowance but if it is not used on their death, it is lost. For a married couple, if the survivor inherits from the first to die, the estate of the second to die of the couple will not have a combined £2m allowance and the allowance is ‘use it or lose it’ on each death.
Payment in instalments – interest-free: Any IHT on agricultural or business property worth more than £1m can be payable in instalments over 10 years. Importantly, the instalment option is interest-free. This will mean that landowners can include annual IHT payments in their budgets or cashflow forecasts, spreading the tax burden over a longer period and at no cost. Assuming IHT is levied at 20%, the instalment option means paying 2% per year for 10 years.

How will the rules apply to trusts?

The rules are slightly different for APR and BPR qualifying assets held in trusts, particularly trusts that are taxed according to the ‘relevant property regime’ for IHT (ie charges on 10-year anniversaries and when capital leaves the trust).

Older trusts have their own £1 million allowance: Trusts settled or re-settled before the Budget (30 October 2024) that already held qualifying agricultural or business property will each have their own full £1 million allowance. This is potentially valuable to landowners, particularly where an estate is owned by several older trusts.
Newer trusts share the allowance: However, trusts settled or re-settled after the Budget will share the allowance, allocated chronologically to all relevant trusts established by the same settlor. This means that if a settlor transferred £1 million or more of qualifying property to a trust after the Budget (eg taking advantage of the time-limited window to do so before 6 April 2025), that trust will have a full £1 million allowance for 10 year charges or exit charges, but any subsequent trusts will have no allowance for future IHT charges.
Using the allowance in trust administration: The new rules envisage that the allowance will be used at least every 10 years and will then renew. The allowance is used first against exit charges and any of it that remains will then be used for the next 10-year anniversary charge. The full allowance then renews for any subsequent exit charges and the next 10-year anniversary charge. This allows trustees to decide how best to allocate the allowance in a 10-yearly cycle.
Exit charges for older trusts – a concession?: Trusts settled before the Budget will be able to use the current regime (ie no cap on APR/BPR) for exit charges until their next 10-year anniversary falling on or after 6 April 2026, including trusts that have not yet reached their first 10-year anniversary. This gives trustees a time-limited opportunity to distribute APR and BPR assets to beneficiaries with no exit charge before the new regime starts to apply to the trust. The window available for this will depend on each trust’s 10-year anniversary date.
Payment in instalments: Trustees will also be able to pay IHT in interest-free instalments over 10 years, allowing them to budget accordingly. Assuming IHT is levied at 3%, the instalment option for a 10-year anniversary charge means paying 0.3% per year for 10 years.

What to do next?

Landowners and trustees holding landed estates should continue preparing for the new regime to apply on their death or when their trusts next have an IHT charge. For many well-run estates this may simply be a matter of continuing to do what they are already doing.

It is important to remember that estates that are already eligible for APR and/or BPR will still be eligible: the tests for APR and BPR have not changed and Balfour planning remains available. What is changing is not eligibility for relief but the level of relief available. Paying IHT at 20% (or up to 3% on trust IHT charges) is still a saving on the full rates of IHT at 40% or 6%, especially if careful Balfour planning for a mixed landed estate business means that some underlying assets which would otherwise be unrelieved benefit from BPR, and the tax can be spread over 10 years without interest.

There are still opportunities for restructuring (some of which have a time-limited window), which might include:

Reviewing Wills: Many Wills are drafted to take advantage of the current APR and/or BPR rules to ensure that the reliefs are captured on a first death, while other planning relies on transferring everything to a surviving spouse. Planning and drafting will need to be revisited, particularly given the “use it or lose it” nature of the £1 million allowance on first death.
Lifetime gifts: Outright gifts of relievable assets can be made without an upfront tax charge as Capital Gains Tax (CGT) can be “held over” for business assets that qualify for APR or BPR, with the recipient inheriting the donor’s base cost. If the gifts are survived by seven years, there will be no IHT charge on the transfer. Outright lifetime gifts are the surest way of preventing an IHT charge, as long as the donor can afford to give away the asset(s) and survive the gift by at least seven years. There is no current indication from the government that these rules will change.
Wind up or make significant exits from existing trusts: If there is an identified successor who is ready to take on running an Estate, trustees could distribute relievable assets to them before 5 April 2026 or before the trust’s next 10-year anniversary provided the trust was created before 30 October 2024. Any IHT exit charge should be covered by relief in full, and holdover relief will likely apply to defer CGT. If succession is more uncertain, trustees may opt to keep older trusts going to take advantage of each having its own £1 million allowance.
Settle new trusts: Settling a new trust to hold relievable assets before 5 April 2026 will allow a landowner to get these assets out of their estate and into trust with the IHT entry charge covered by relief in full. From 6 April 2026 onwards, this transfer into a trust will incur an IHT entry charge at an effective rate of 10%. While the new trust will be subject to the new IHT rules (10-year charges and exit charges), the trustees will have certainty about when those IHT charges will fall (at least every 10 years) rather than having to plan for a more significant liability on death.
Life interest trusts: Trusts with a qualifying interest in possession (life interest trusts) will continue to be taxed on the death of the life tenant. The life tenant’s £1 million allowance will be shared by the trustees and the executors of their estate. A life tenant could decide to give up their life interest now provided they can manage without the income. What happens next depends on the terms of the trust. If the trust fund passes outright to an individual or individuals it is taxed in the same way as a lifetime gift: if the trust assets qualify for APR and/or BPR there is likely no CGT charge (holdover relief will be available), and there is no IHT charge if the life tenant survives seven years or more. If on giving up the life tenant’s life interest, the trust assets remain in trust, for instance held on discretionary trusts for the next generation and beyond, this is taxed in the same way as settling a new trust (see above). There is therefore a time-limited opportunity to explore if this might be a good opportunity to benefit the next generation of beneficiaries.
Valuation: A crucial question for the new taxing regime will be valuation. In the coming months this will be particularly important where land owners want to take advantage of the time-limited window to transfer assets into a trust, or after 6 April where the planning is to take advantage of the £1 million allowance (plus the regular nil rate band allowance) to gift assets to a trust, and for all exit and 10-year charge calculations on trusts in the future. We imagine that, as they do now, HMRC will continue to focus on non-agricultural value on land (eg hope or development value) which is not covered by APR, as well as the character appropriateness of farmhouses and, for BPR, excepted assets.
Cashflow planning: Landowners and their trustees should start planning for how they will pay IHT when those charges fall due. That might include setting aside income in a trust (if permitted) to pay IHT when it falls due or factoring it into a budget. Life insurance may well be appropriate in some circumstances. As the new regime becomes clear, a considered plan made in advance to pay IHT is essential.

Tax is a very important part of any succession strategy, but it is not the only consideration. Planning that is based solely on IHT mitigation might overlook other relevant factors, such as a successor’s appetite to take on running an Estate, their aptitude or family circumstances, the risks of family disagreements if one heir seems to have been chosen unfairly to the exclusion of another, and so on. Landowners should always take care that in finding a solution to tax issues they do not inadvertently create problems in other areas.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.