The reforms to business property relief and agricultural property relief came in this month. For family businesses and farms, the rules are now genuinely different. The £2.5 million allowance per person is in place, transferable between spouses and civil partners, which gives couples a combined £5 million of relief if their wills are set up properly.
Plenty of owners are only just working out what this actually means for them. Here’s where things stand and what’s worth doing about it.
£5 Million Sounds Generous, But Read the Small Print
The £2.5 million allowance covers farms and other businesses combined, not separately. Own a £5 million trading company and a £5 million farm? You don’t get £10 million of relief. You get £5 million split across the two.
Take a £10 million business with no other planning. The first £5 million gets full relief. The next £5 million gets 50%, leaving £2.5 million taxable at 40%. That’s a £1 million inheritance tax bill on an estate that wouldn’t have paid a penny before.
The Real Problem Is Paying the Bill
You can pay the tax over 10 years interest-free, which sounds workable. But there’s a catch most estates run into.
The liability sits with the estate, not the company. And most estates don’t have the cash lying around to cover it. So you end up pulling money out of the business, usually as dividends, and that brings income tax with it.
So your £1 million bill isn’t really a £1 million bill. To get £100,000 a year out as dividends, you’d need to declare around £167,000 to cover the income tax at nearly 40%. Suddenly you’re looking at something closer to £1.67 million, and that’s before corporation tax gets a look in.
Why Life Cover Is Worth a Serious Look
If you don’t want to start handing over control of your business, life assurance is one of the better answers right now. Three options worth weighing up:
Whole of life cover. Pricey, but a financial adviser can run the numbers. Sometimes the total premiums work out cheaper than the eventual tax bill.
Term assurance. Cheaper, and it covers you for the seven years a gift takes to fall out of your estate.
Relevant life policies. Taken out by the company. Set up properly, the premiums are deductible for corporation tax and the payout isn’t taxable. It can be one of the most tax-efficient ways to fund the bill.
Trusts Still Have a Place, But the Cheap Door Has Shut
The pre-April rush to drop assets into trust without an entry charge is done. Anything above the £5 million combined allowance going into trust now gets hit with a 20% entry charge, which changes the math quite a bit.
That said, trusts aren’t useless. They still let you take future growth out of your estate and keep some control through the trustees. But they bring their own tax baggage, including a 6% charge every 10 years on value above the nil rate band. The trust also needs cash to pay that charge, which usually means dividends from the company and another round of income tax.
For businesses worth around £10 million or less, a direct gift is often the simpler route. Hand over shares, live seven years, and your allowance refreshes for whatever’s left in your estate.
Excepted Assets Catch People Out
Even a proper trading company can hold things that don’t qualify for relief. A holiday let owned by the company, surplus property being sublet, or a big cash pile with no obvious business purpose can all get classed as excepted assets.
If HMRC decides £500,000 of your business value sits in excepted assets, that chunk loses its relief. Board minutes explaining why the company holds significant cash, whether that’s for refurbishments, share buybacks, or stock, are worth having on file. Same goes for any property the business owns but isn’t actively using.
Pensions and Commercial Property: The Next Headache
From April 2027, pensions come into the inheritance tax net. With less than 12 months to go, this is now the biggest planning issue for a lot of owners.
The trickiest cases are owners who hold their business premises inside a SIPP or SSAS. Property in a pension won’t qualify for business relief because pensions count as investments. The same property held inside the trading company often will. On top of that, pension-related IHT may not get the 10-year interest-free payment terms, so you’ve got a real mismatch on your hands.
For many owners, it’s worth looking at whether the company should buy the property back from the pension before death. Do it after death and the relief is gone for good, which is the sort of mistake you only make once. With the deadline coming up, this isn’t a conversation to put off.
The old wisdom of leaving your pension untouched as the most tax-efficient thing to inherit is also going out the window. From April 2027, drawing it down and spending it may make far more sense than holding onto it. That’s a tough mental shift after years of being told the opposite.
So What Should You Actually Do?
The new rules are awkward on purpose. The complexity is what stops people from acting, and inaction is what brings in the most tax. A few practical starting points:
Get your business properly valued so you know what you’re working with. Check your wills so both spouses can use their full allowance. Audit anything that looks like an excepted asset and write down the commercial reason for cash on the balance sheet. Get a quote on life cover for a benchmark. And if your business premises sit in a pension, start that conversation now, not next year.
Don’t Try to Sort This Out on Your Own
This is properly complex territory, and getting it wrong can cost six figures or more. Generic online advice only goes so far, because every business and family has its own quirks. Who owns what, how the wills are written, what’s sitting on the company balance sheet, how pensions are structured, what the next generation actually wants out of the business. All of it matters.
You need a qualified accountant who works with family businesses and farms regularly. Firms like Bevan Buckland in South Wales have put a lot of work into helping owners think through these reforms and the planning that goes with them. The earlier you start, the more options you’ve got.
The rules have changed. What you do about them is still up to you.
