For decades, Business Property Relief was the quiet reason many family companies passed from one generation to the next without being broken up. Qualifying business assets attracted 100% relief from Inheritance Tax. The value did not matter. A trading company worth eight million pounds passed as cleanly as one worth eight hundred thousand.
That changed on 6 April 2026. From that date, the 100% rate of Business Property Relief and Agricultural Property Relief applies only to the first £2.5 million of qualifying assets. Value above the allowance attracts relief at 50%, which in practice means an effective Inheritance Tax rate of 20% on the excess.
How the allowance actually works
The £2.5 million allowance is a combined one. It covers business property and agricultural property together, not £2.5 million of each. If you own a farm with a qualifying agricultural value of £1.5 million and shares in a trading company worth £2 million, you do not have two allowances. You have one, and £1 million of that combined value falls above it.
The allowance sits alongside the existing nil rate band and residence nil rate band rather than replacing them. It is applied to qualifying assets before those bands are considered.
Importantly — and this is the point most often reported incorrectly — any unused part of the allowance is transferable to a surviving spouse or civil partner. A couple can therefore shelter up to £5 million of qualifying business or agricultural property at the 100% rate between them. The transfer applies even where the first death occurred before 6 April 2026, in which case the full £2.5 million allowance is treated as available to transfer. Combined with the nil rate bands, two individuals can pass on up to £5.65 million without an Inheritance Tax charge.
Trusts have their own separate £2.5 million allowance, and anti-fragmentation rules exist to stop the allowance being multiplied by creating a series of them. Assets that previously attracted 50% relief, such as shares quoted on AIM and other unlisted market shares, continue at the lower rate in all cases and do not benefit from the 100% band at all.
A worked example
Consider a couple who own a trading company valued at £8 million between them, held equally, plus a family home worth £700,000 and modest savings.
Under the old rules, the company shares passed entirely free of Inheritance Tax on each death. The planning question was rarely about tax at all. It was about who should run the business.
Under the new rules, each spouse holds £4 million of qualifying shares. On the first death the shares pass to the survivor under the spouse exemption, so no tax arises then, and the deceased’s unused £2.5 million allowance transfers across. The survivor therefore has £5 million of allowance available.
On the second death the survivor holds the full £8 million of shares. Five million attracts 100% relief. The remaining £3 million attracts relief at 50%, leaving £1.5 million exposed to Inheritance Tax at 40% — a liability of £600,000 on a business that, a year earlier, would have passed without any tax at all.
The claim to transfer the unused allowance has to be made. It is not automatic, and it is exactly the sort of thing that gets missed when an estate is administered without anyone knowing the business history.
Where the money would actually come from
The uncomfortable part of an Inheritance Tax bill on business assets is that the assets themselves rarely produce cash on demand. A family cannot sell a fifth of a bakery.
The instalment option allows tax on qualifying business and agricultural property to be paid over ten annual instalments, and for the assets now caught by the allowance that facility has been extended on an interest-free basis. That helps with cash flow, but it does not reduce the bill, and it commits the next generation to a decade of payments funded out of trading profits.
The alternatives are the ones estate planners have always recommended and owners have always postponed. Life assurance written into an appropriate trust so that the proceeds fall outside the estate and are available immediately. Structured lifetime giving, taken early enough that the seven-year clock has a realistic chance of running. Cross-option agreements between shareholders, properly funded, so that a death does not force a distressed sale.
What to do now
Three things are worth doing this year rather than next.
Establish a defensible valuation. Many owners have only a rough idea what their business is worth, and the number they carry in their head is often the number from the last time they thought about it seriously. The allowance makes valuation a live issue rather than an academic one.
Read your Will with the allowance in mind. Most Wills were drafted on the assumption that unlimited relief was available. That assumption is no longer true. The good news is that because the allowance transfers between spouses, the old advice to route business assets into a trust on the first death purely to avoid wasting relief is no longer necessary in most cases — though trusts still earn their place for control, divorce and generational protection.
Confirm the business still qualifies. Relief is denied to businesses consisting wholly or mainly of dealing in securities, land or investments. Companies that have accumulated substantial cash or an investment property portfolio alongside the trade can drift towards the wrong side of that line without anyone noticing. A company that fails the trading test does not get a reduced allowance. It gets nothing.
The point that matters
The allowance does not stop family businesses passing down. It means that doing so now requires a plan where previously it required only a Will. At £2.5 million per person, and £5 million for a couple, a great many family firms will pass with no charge at all — but the ones above it need to know where they stand, and the claim to transfer an unused allowance needs to be made rather than assumed.
This is general guidance rather than advice on your circumstances, and the interaction between the allowance, trusts and lifetime gifts is genuinely technical. If you own a business or farmland of any substance, this is the year to have the conversation properly.