The £2.5 Million Question: How the New Cap on Business and Farm Inheritance Tax Relief Actually Works

If you own a business or a farm, an inheritance tax change that took effect on 6 April 2026 may be the most consequential estate-planning shift you'll face this decade — and it's easy to misunderstand exactly where the new limit bites.

What changed

Business Property Relief (BPR) and Agricultural Property Relief (APR) have long let qualifying business and farm assets pass to heirs free of inheritance tax at 100%, provided ownership conditions were met. From 6 April 2026, that 100% relief is capped at a combined £2.5 million per person across BPR and APR together. Anything above that £2.5 million gets only 50% relief — which works out to an effective 20% inheritance tax rate on the excess, rather than the 0% that applied before.

Because the £2.5 million allowance is transferable between spouses and civil partners in the same way the main nil-rate band is, a married couple can potentially shelter up to £5 million in qualifying business or agricultural assets at the full 100% rate between them, with careful planning.

AIM shares lose their automatic pass

Shares listed on the Alternative Investment Market (AIM) — often used as an inheritance tax planning tool because many qualify for BPR — no longer receive automatic 100% relief either. Most AIM holdings that do still qualify now get 50% relief, again landing at roughly a 20% effective rate, which changes the maths for anyone who built an AIM-heavy portfolio specifically to reduce a future inheritance tax bill.

The wider freeze

This sits alongside the government's confirmation that the main nil-rate band (£325,000) and residence nil-rate band (£175,000) will stay frozen until April 2031. With asset values generally rising over time, a frozen threshold means more estates get pulled into inheritance tax each year even without any change in the rules that apply to them — sometimes called fiscal drag.

What business owners and farmers should do

• Get a current, professional valuation of your qualifying business or agricultural assets — you can't plan around a £2.5 million cap without knowing where you sit against it.
• Model the tax bill at 20% on anything above the cap, rather than assuming the old 0% treatment still applies in full.
• Check whether your ownership structure lets you use both spouses' £2.5 million allowances, since this isn't automatic — it depends on how assets are held and transferred.
• Review any AIM-heavy investment portfolio built specifically for inheritance tax mitigation, since the relief basis underneath it has changed.
• Talk to a specialist about life insurance held in trust to cover a potential 20% liability on the excess, a common way to fund an inheritance tax bill without forcing a sale of the business or farm itself.
• Don't wait until a health scare to start planning — much of the value in APR/BPR planning comes from structures and gifts that need time (often years) to take effect.

How other countries compare

The US federal estate tax exemption sits at a level equivalent to well over £10 million per person once converted, making it far more generous than the UK's post-2026 business relief cap, though individual states can add their own estate or inheritance taxes on top. Australia has no inheritance or estate tax at all, having abolished it decades ago, making the UK's regime — even before this change — comparatively demanding for family business succession by international standards.

Key Numbers

• £2.5 million — new combined cap on 100% BPR/APR relief per person
• 50% — relief rate on value above the cap (≈20% effective IHT rate)
• £325,000 / £175,000 — main nil-rate band / residence nil-rate band, frozen to April 2031

Sources

• Inheritance tax changes — key facts to know before the April 2026 deadline — RSM UK
• Inheritance Tax 2026 UK: Key Changes & New Rules Guide — BLB Solicitors

Educational content only — not financial advice.