The Labour inheritance tax changes are beginning to affect succession planning for family businesses, farms and investors, with further reforms scheduled to take effect in April 2027.
Changes to Agricultural Property Relief and Business Property Relief came into force on 6 April 2026. The government has also frozen the main inheritance tax thresholds until April 2031 and confirmed that most unused pension funds and pension death benefits will become part of a deceased person’s estate from 6 April 2027.
Together, the measures mean some families may need to review how businesses, agricultural land, pensions and other assets would be transferred after death.
Agricultural and Business Relief Is Now Capped
Before April 2026, qualifying agricultural and business assets could generally receive inheritance tax relief of up to 100%, provided the relevant conditions were met.
Under the new rules, 100% relief is restricted to the first £2.5 million of combined qualifying agricultural and business property. Qualifying value above that allowance generally receives 50% relief, producing an effective inheritance tax rate of up to 20% rather than the standard 40%.
Tax due on qualifying agricultural or business property can be paid through equal annual instalments over 10 years without interest. This may reduce the immediate cash-flow pressure on estates that hold valuable assets but do not have sufficient cash available to settle the liability at once.
The allowance can also be transferred between spouses and civil partners in qualifying circumstances. The government says this could allow a couple to pass on as much as £5 million in qualifying agricultural or business assets before inheritance tax applies to those assets, in addition to other available exemptions and allowances.
Higher-Value Family Businesses Face Greater Exposure
The changes are particularly important for family-owned companies and farms worth more than the new £2.5 million allowance.
An estate containing £4 million of qualifying business property, for example, may still receive 100% relief on the first £2.5 million. The remaining £1.5 million could receive 50% relief, leaving £750,000 potentially exposed to inheritance tax before considering other allowances, exemptions or liabilities.
The precise calculation will depend on the ownership structure, asset type, previous transfers and any unused allowance inherited from a spouse or civil partner. Business owners may therefore need current valuations rather than relying on historical estimates of what their company or land is worth.
The rules may also influence succession decisions. Some estates could have to use cash reserves, borrowing, insurance or asset sales to meet an inheritance tax bill, even where the underlying business remains profitable.
AIM Investments Receive Less Business Relief
The Labour inheritance tax changes also affect certain shares traded on markets such as the Alternative Investment Market.
Qualifying AIM shares can now receive Business Relief at 50%, rather than the 100% relief that could previously have been available when the ownership and business conditions were satisfied. This means eligible AIM holdings may face an effective inheritance tax rate of up to 20%.
The change could alter the role of AIM portfolios in estate-planning strategies. Investors who previously selected qualifying shares partly because of their potential inheritance tax treatment may need to reassess the balance between tax planning, investment risk and expected returns.
Business Relief is not automatic. Assets must satisfy HMRC’s qualifying conditions, including the relevant ownership requirements, and some businesses or investment activities do not qualify.
Unused Pensions Will Enter Estates from 2027
A further major change is scheduled for 6 April 2027, when most unused pension funds and pension death benefits will be brought within the deceased person’s estate for inheritance tax purposes.
Pensions have often been treated differently from other inherited assets, allowing some unused funds to pass outside the estate. Bringing them into the inheritance tax calculation could increase the value of estates and create liabilities for families that would previously have paid no inheritance tax.
The government estimates that approximately 10,500 estates with inheritable pension wealth could become liable for inheritance tax where no liability would previously have arisen. A further 38,500 estates are expected to pay more tax than under the previous treatment.
Personal representatives will be responsible for reporting and paying inheritance tax due on affected pension funds and death benefits. Death-in-service benefits paid from registered pension schemes are expected to remain outside the estate under the confirmed rules.
Frozen Thresholds May Bring More Estates Into The System
The ordinary inheritance tax nil-rate band will remain at £325,000, while the residence nil-rate band will stay at £175,000. The residence allowance continues to taper for estates worth more than £2 million.
These limits have now been frozen until 5 April 2031. As property, business and investment values rise, keeping the thresholds unchanged could gradually bring more estates into the inheritance tax system, even without an increase in the standard 40% rate.
Not every estate can use the residence nil-rate band. Eligibility depends on factors including whether a qualifying home is passed to direct descendants and the overall size of the estate.
Trust Reporting Will Be Simplified In Some Cases
Not every element of Labour’s inheritance tax programme increases liabilities or administration.
The government has announced plans to simplify reporting for certain trust transfers and trust events where no inheritance tax is payable. From 6 April 2027, some trustees and individuals will no longer have to submit inheritance tax accounts for qualifying non-taxpaying events.
At the same time, separate measures are closing inheritance tax loopholes involving some offshore and charitable trust arrangements. The government also intends to align the treatment of UK agricultural property held through offshore structures with property held directly by long-term UK residents.
Families And Business Owners May Need Updated Plans
The reforms do not mean every farm, business or pension will produce an inheritance tax bill. Existing exemptions, spouse transfers, debts, nil-rate bands and the new £2.5 million relief allowance can substantially affect the final calculation.
However, plans created under the previous rules may no longer produce the intended outcome. Business owners may need to review company valuations, shareholder agreements, wills, pension nominations and funding arrangements for a potential tax liability.
Any decision to transfer assets, change pension withdrawals or restructure business ownership can have inheritance tax, capital gains tax and commercial consequences. Personalised advice should therefore come from a suitably qualified tax, legal or financial professional rather than from general information alone.
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