No relief for business owners: Government holds fast on changes to Business Property Relief

We have been waiting for this moment for quite some time. On 21 July 2025, the much-anticipated draft legislation reforming Agricultural Property Relief (APR) and Business Property Relief (BPR) was published, together with a policy paper and responses to the technical consultation. This is highly relevant for all entrepreneurs and family business owners and their boards.

Despite the pressure applied by a wide variety of stakeholders throughout the consultation process, the Government has generally stuck to their guns, with few changes made to the original proposals presented in the budget last October.

These changes were always likely to encourage entrepreneurs, investors, owner-managers and trustees with valuable business interests to reconsider aspects of their planning strategies and in some cases accelerate succession plans at quite a pace.

The changes are likely to lead to particular challenges for trustees where the sole trust asset is a shareholding in a private trading business – a relatively common scenario for family businesses given:

1. the historic Inheritance Tax (IHT) efficiency of holding shares in a trading business in trust; and
2. the asset protection benefits of trusts as a tool for multi-generational succession planning.

Most of these trusts will now face IHT charges for the first time.

Now that the shape of the proposed legislation is clearer, there is a limited window for putting in place a robust long-term strategy before the changes are fully implemented on 6 April 2026. We have highlighted below five key takeaways from the draft legislation and some initial thoughts to assist business owners with crystallising their plans.

Background

Under the current rules, there is no cap on the value of assets that can qualify for 100% relief from IHT with APR or BPR.

From 6 April 2026, each relevant taxpayer will only benefit from a £1m tax-free allowance for combined agricultural and business property qualifying for APR or BPR. To the extent that the value of agricultural and/or business assets exceeds that £1m allowance, those assets will only be entitled to relief from IHT at 50% of the applicable tax rate (currently 40%, so an effective tax rate of 20%).

Special “anti-fragmentation” provisions will apply to trusts for the purposes of calculating IHT 10-year anniversary or exit charges. Each trust created before 30 October 2024 will have its own £1m allowance. However, where the same individual has created multiple trusts holding agricultural or business property on or after 30 October 2024, those trusts will share a single £1m lifetime allowance.

Five key takeaways

1. The most common request from respondents to the consultation was for the £1m BPR/APR allowance to be transferable between spouses and civil partners (e.g. if not used on the death of the first). This mirrors the treatment of the nil rate band and the residence nil rate band. The Government has not included this concession in the draft legislation citing “an Exchequer cost” as the rationale. The £1m allowance will therefore not be transferable and married couples/civil partners will need to plan effectively to “bank” the full £2m of relief which they have between them. This may involve transferring assets between spouses/civil partners and reviewing the contents of their Wills. It is also worth remembering that fragmentation of ownership, while increasing tax efficiency, also naturally increases the risk of disputes down the line e.g. on divorce or death/remarriage.
2. The draft legislation has clarified that the £1m allowance on lifetime gifts made by individuals will refresh every 7 years (in the same way as the IHT nil-rate band). For trusts, the £1m allowance will apply across the lifetime of the trust at each ten year anniversary and on exits of capital. Where the £1m allowance is shared between multiple trusts, it will be allocated on a chronological basis i.e. if the assets of the first trust created are valued at more than £1m, the first trust will receive the full £1m allowance, with no allowance remaining to be applied against subsequent trusts.
3. The £1m allowance will (we are told) be indexed in line with the Consumer Price Index, although it will remain fixed up to and including 2029/30 (consistent with the freezing of the nil-rate band and residence nil-rate band at current thresholds).
4. The draft legislation does not include the previously mooted extension to the “related property rules”, which would have connected holdings across multiple trusts created by the same individual for valuation purposes. The Government has acknowledged concerns regarding the difficulties with implementing such a provision and have decided that the anti-fragmentation provision provides sufficient disincentive for those considering splitting assets across multiple trusts.
5. Crucially, there will be the option for taxpayers to pay IHT by equal interest-free annual instalments over 10 years, extended to all property which is eligible for BPR/APR. This may provide some comfort for those business owners without high levels of liquidity, although the annual IHT cost (a capital expense) will need to be factored into business accounts and plans going forward.

What next?

There will now be a technical consultation on the draft legislation which will run for 8 weeks, ending on 15 September 2025.

This leaves limited time for implementing strategic shifts before the April 2026 deadline. Therefore, if they have not done so already, business owners should be encouraged to carry out a review of their business assets, not with just tax in mind but their wider succession planning. Five key things to think about:

1. Working out the ultimate goal – and not letting the tax tail wag the dog. For example, it may be that the IHT changes are less relevant if a sale is on the horizon. On the other hand, if the plan is to build a business to last many generations, how is that best protected?
2. Reviewing existing structures and work out who owns what – sometimes this issue is not as clear as it might be. The de facto controller of the business and the “boss” may not be the (only) owner. Business owners should also review their own Wills, particularly any containing specific gifts of BPR assets to check that they still work to capture the IHT relief as intended – especially now that it has been confirmed that the allowance will not be transferable between spouses.
3. Obtaining a current market valuation of the business as a whole – when 100% BPR was available on the full value, an accurate valuation was less pressing. However, now, without a proper valuation, there is no sense of the scale of the potential problem under the new rules. Valuing minority shareholdings with applicable discounts will need careful thought (although note that there is no discount for shares co-owned by spouses).
4. Looking critically at advisers – are they up to the job? The firms who deal with the everyday needs of the business may not be best placed to look at "bigger picture" succession and strategic issues which affect more than one generation of a family or group of business owners.
5. Considering cash flow planning to determine how any ongoing taxes will be paid. As the new IHT charge can be paid in 10 annual instalments after a taxable event, the effective rate is closer to c.2% per year (on the death of an owner) or 0.3% per year (for trustee owners after an anniversary charge) – this may be more readily factored into the business’ books. Depending on an owner’s health and age, life insurance may form part of the solution.

Lastly, and most importantly, do not wait to take advice. With only 8 months to go until the changes are implemented, it is important to consider planning now, even if this is just a “health check” of the business structure to confirm that it is set up as efficiently as it can be.

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

© Farrer & Co LLP, July 2025