Reducing inheritance tax liability on your agricultural and business assets

Agriculture and family businesses play a crucial role in the UK economy, contributing significantly to the Gross Value Added and employment. Their importance is not only economic but also social and environmental providing community stability, public goods, supporting food security, managing habitats, and contributing to renewable energy production.

Their resilience and long-term focus make them essential for economic growth and sustainability in the UK, underscoring the importance of supporting this sector for future prosperity. One form of support available to the sector is through tax relief on 40% inheritance tax (IHT).

Agricultural and business relief refers to tax reliefs available for qualifying agricultural property and business assets, primarily aimed at reducing inheritance tax burdens on farmers, landowners, and family businesses. This relief plays a vital role in facilitating the transfer of agricultural and business assets, crucial for maintaining the viability of family farms and rural businesses, allowing them to be passed down through generations without the threat of financial strain from incurring significant inheritance tax liabilities.

What assets qualify for agricultural and business relief

Agricultural Relief (AR) is available for assets with an agricultural character. Land that has been actively farmed for a minimum period, typically two years, or owned for at least seven years while being farmed by another person. It includes agricultural buildings and farmhouses if they are of a character appropriate to the land. 100% relief is available if the land is actively farmed or let under a qualifying tenancy, while 50% relief applies if the land is owned but not directly farmed.

Business relief (BR) is available for a wider range of qualifying business assets owned for a minimum period, usually two years. 100% relief is available for sole trader or partner interests in trading businesses and shares in unquoted companies, while 50% relief applies to controlling holdings in quoted companies and certain business assets, e.g. land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership.

What doesn’t qualify for agricultural and business relief are investment businesses, excepted assets, large reserves of cash within a business in excess of any reasonable business requirements, and businesses that are subject to a contract for sale.

What’s changing and how it affects you

In April 2026, a significant change saw a new £2.5 million cap on the 100% inheritance tax relief for combined qualifying agricultural and business assets, limiting relief to the first £2.5 million. Assets exceeding this limit will receive 50% relief, resulting in an effective inheritance tax rate of up to 20%.

If your qualifying assets are valued at £5 million on death, the first £2.5 million will receive 100% IHT relief, with 1.25 million of the assets above this limit (50% of your remaining qualifying assets) taxed at the current IHT tax rate of 40%. This effectively creates a 20% IHT tax rate on qualifying assets above your 100% relief allowance. This is significant because currently there is no restriction on relief at 100% and, therefore, no tax liability.

The 100% relief allowance is transferable between spouses and civil partners, ensuring that unused allowances can be passed on. This creates a £5 million 100% allowance on second death, even if the first death occurred prior to 6 April 2026. However, lifetime gifting of qualifying AR and BR assets made on or after 30 October 2024 may reduce the 100% relief allowance available on death if the donor dies on or after 6 April 2026.

From 6 April 2026, alternative investment market (AIM) shares will no longer qualify for 100% BR and will instead receive 50% BR only. This includes shares held via an enterprise investment scheme (EIS) and listed on AIM. The value of AIM shares will not/cannot use any of the 100% relief allowance. The same is true for any other assets that are currently only relievable at 50%, such as land or buildings owned by an individual but used in their business.

The option to pay inheritance tax in up to 10 annual instalments, interest free, will be extended to all assets eligible for AR and BR. These changes will significantly impact estate planning strategies and the tax implications for farmers and business owners.

Using a life insurance policy to cover an IHT liability

For farmers and business owners who now face a significant IHT liability following the introduction of a lifetime cap, one option which may mitigate the impact of this on the beneficiaries is to take out a life insurance policy (on second death if married) that pays out the expected IHT liability into trust on death. This ensures that the payout does not become part of the deceased’s estate and is available for use by their executors to pay the IHT liability.

Premiums paid during lifetime can also contribute to slowly reducing estate values and if paid out of monthly income are considered normal expenses and not a lifetime gift to beneficiaries and do not use a portion of your personal IHT nil rate band of £325,000.

There are considerations to taking out a life insurance policy, as with all options there are benefits and potential drawbacks; however, it can be an effective strategy to manage IHT liabilities.

Using lifetime gifting to cover an IHT liability

To gift qualifying business assets to family during your lifetime, consideration should be given to making lifetime gifts to children within your available allowances, rather than waiting until death. Direct gifts will be potentially exempt transfers (PETs) and won’t suffer an immediate IHT. On surviving seven years from gifting, the value of the gift will be deemed out with your estate and any IHT relief allowance used will be refreshed.

Qualifying business assets, including company shares, can also be gifted into a relevant property trust, which enables control of the assets to be retained by the trustees, while eventually removing the value of the asset from your estate on surviving seven years. The gift will be a chargeable lifetime transfer (CLT) but again there will be no immediate IHT charge provided gifts are less than your 100% relief allowance £2,500,000 in any seven-year period.

Gifts made in excess of the allowance will suffer an immediate lifetime charge of 20% on half the value of the gift – an effective rate of 10%. It may be possible to gift more than £2,500,000 without a tax charge if the trust has any of the normal nil rate band of £325,000 available to it.

Your 100% relief allowance refreshes every seven years, allowing a rolling program of gifting with no IHT provided the seven-year cumulation value does not exceed £2,500,000, across all trusts and direct gifts. It is important to note that trusts created before 30 October 2024 will each get their own allowance of £2,500,000, however, if multiple discretionary trusts have been created on or after 30 October 2024, the allowance will be shared between the trusts in chronological order.

It is important to consider that if the donor does die within seven years of making the gift, and the individual or trust no longer holds qualifying AR and BR assets or the assets no longer qualify for AR/BR, then the relief is clawed back when reassessing the gift for IHT purposes on death.

Capital gains tax on gifts of agricultural property

When gifting agricultural property during your lifetime, capital gains tax (CGT) may apply if the property increases in value after the donor acquired it. HMRC treats the gift as a disposal at market value, meaning the gain is taxed as if the property was sold. This applies even if no money is exchanged. There is the potential to use holdover relief, but the rules are complex, and it is advisable to seek professional advice to ensure compliance with the latest regulations and to plan for any potential CGT liabilities.

Gifts with reservation

Along with the practicalities of making lifetime gifts of farming and other assets to consider, for example, can the recipient afford to maintain and run the assets, family dynamics, and site-specific legalities, is The Gifts with Reservation of Benefits (Grob) rules, which require that once an asset has been transferred, the donor should no longer derive any benefit from it. If HMRC determines that someone has given away but retains a benefit in an asset, it may be treated as part of the donor’s estate for inheritance tax (IHT) purposes. A classic example of a Grob is for someone to continue living in a house or using business assets that they have already given away. The IHT potential of this can be managed by the giver paying a market rent to the new owner for use of the asset, although this is not always efficient nor practical.

How can we help?

The rules regarding agricultural and business relief qualifying assets, lifetime gifting both directly and into trusts, as well the use of life insurance policies can be complex and nuanced, with various exceptions and personal circumstances adjusting the landscape and possibilities available. If you feel you may be affected by the recent changes and would like to discuss your options for mitigating your IHT liability, out team of financial planners at Anderson Strathern Asset Management are here to help, and offer a no-cost, no obligation initial meeting to give you an opportunity to discuss your current circumstances and receive initial practical and strategic guidance on potential options available to you.

Tax treatment depends on individual circumstances, and all tax rules may change in the future. Anderson Strathern Asset Management Limited is not authorised to provide tax advice, and information supplied should not be relied on for tax, accounting or legal advice.