Farms and Family Businesses: The New £2.5 Million Cap on Agricultural and Business Property Relief

For family farms and trading businesses, one of the most significant Inheritance Tax changes in decades took effect on 6 April 2026 - ending unlimited 100% relief that had, for many estates, made passing on a farm or business entirely free of IHT. It’s one of two major reliefs disappearing around the same time - alongside pensions, which lose their own long-standing Inheritance Tax advantage from April 2027 (see our dedicated article on why pensions are losing their IHT advantage).

What Agricultural Property Relief and Business Property Relief used to offer

Agricultural Property Relief (APR) and Business Property Relief (BPR) allow qualifying farms and trading businesses to reduce their value for Inheritance Tax purposes, at a rate of either 50% or 100% depending on the specific asset. Until April 2026, qualifying assets could receive 100% relief with no upper limit - meaning a farm or business of any value could, in principle, pass entirely free of Inheritance Tax.

What changed on 6 April 2026

100% relief is now capped at the first £2.5 million of combined qualifying agricultural and business property per individual. Value above this threshold receives only 50% relief, producing an effective IHT rate of 20% on the excess (since 40% IHT applies to the 50% that isn’t relieved). This final £2.5 million figure followed a genuinely contested process - the original October 2024 announcement proposed a much lower £1 million cap, which the government raised to £2.5 million in December 2025 after sustained pressure from farming and business groups, with the change confirmed in the Finance Act 2026. The allowance is set to stay frozen at £2.5 million until April 2031, with increases in line with CPI inflation planned from then.

The allowance is transferable between spouses

Following the announcement at the 2025 Autumn Budget, any unused part of the £2.5 million allowance is transferable between spouses and civil partners, in line with how the standard nil-rate band works. This means a married couple can potentially shelter up to £5 million of combined qualifying agricultural and business property at the 100% relief rate.

A worked example

A farming family with £5 million of qualifying agricultural property, held by a single individual: the first £2.5 million receives 100% relief, the remaining £2.5 million receives 50% relief, leaving £1.25 million exposed to IHT at 40% - a new liability of £500,000 that wouldn’t have existed under the old, uncapped rules, before accounting for the standard nil-rate band or other available reliefs.

The new payment flexibility

In recognition of the difficulty many farming and business-owning families face in raising cash to pay an IHT bill without selling the underlying asset, the government extended the option to pay Inheritance Tax on qualifying agricultural and business property by equal annual instalments over 10 years, interest-free, from April 2026 - a genuinely valuable concession for families wanting to retain the farm or business rather than sell part of it to fund the tax bill.

Who’s actually affected

HMRC’s own Tax Information and Impact Note estimated that only around 185 estates claiming APR are expected to pay more Inheritance Tax as a direct result of this change in 2026/27, representing roughly 15% of APR-claiming estates - the government has consistently said the changes are targeted at a wealthy minority rather than typical working farms, though this remains a point of significant contention among farming and business groups.

The reduced relief on AIM shares

Alongside the APR/BPR cap, relief on shares designated as “not listed” on a recognised stock exchange (such as AIM shares, a common estate planning tool) was reduced from 100% to 50% in all cases - a separate but related change that removes a previously popular route for sheltering investment portfolios from IHT via AIM share holdings.

What affected families should do

• Get a current valuation of all qualifying agricultural and business property, since the cap applies per individual and understanding where you sit against the £2.5 million threshold is the essential first step.
• Consider whether transferring assets between spouses could make better use of both individuals’ £2.5 million allowances.
• Review whether the 10-year interest-free instalment option changes your succession planning, particularly if the concern was primarily about raising cash to pay a tax bill rather than the tax itself.
• Seek specialist advice - this is a genuinely complex, recently changed area, and generic guidance is a poor substitute for advice tailored to your specific farm or business structure.

The bottom line

The end of uncapped 100% relief on agricultural and business property is one of the most significant Inheritance Tax changes in a generation for farming and business-owning families, though the final £2.5 million cap (up from the originally proposed £1 million) and the new interest-free instalment option provide meaningfully more flexibility than the initial 2024 proposal. Anyone with qualifying assets approaching or exceeding this threshold should seek specialist advice promptly.