From Monday 6 April, the controversial new inheritance tax (IHT) regime for farmers and family business owners comes into force – with further changes to IHT in relation to pensions also due to take effect from April 2027.

Until 6 April 2026, many business and agricultural assets as well as many private company shares benefitted from full relief against inheritance tax meaning that these could be passed on to the next generation without attracting a large tax payment.

From 6 April 2026, the first £2.5m of combined agricultural and business property will continue to receive 100% relief from inheritance tax on both lifetime and death transfers, with 50% relief on amounts over £2.5m.

Lifetime gifts and settlements made more than seven years before death will continue to be excluded from IHT on death, with taper relief available to progressively reduce the IHT rate between three and seven years.

Each person will have a £2.5m allowance. It was initially proposed that any unused allowance would not be transferable between spouses and civil partners. However, in the 2025 Budget it was announced that any unused portion of the allowance at death could be transferred. Equally, where the allowance is used against lifetime transfers this will refresh after seven years.

The spousal exemption remains unchanged, so assets can pass to a UK, long-term resident spouse free of IHT during lifetime (or on death). 

Elsa Littlewood, a private client partner at BDO said:

“The coming into force of this new inheritance tax regime is a watershed moment for the farming and family business community.

"While there have been some important and welcome concessions made since these new rules were initially announced, the new policy is nevertheless a significant departure from the previous regime and will pose significant challenges for those businesses in scope.

“Business and farm owners will no longer be able to ‘die with their boots on’ knowing that they can pass on the business to the next generation free of inheritance tax. Instead, they will need to devote much more time and attention to their succession planning earlier in their lives to ensure their business can be transferred in the most efficient manner and which gives the business the best chance of surviving and succeeding over the longer term. This is particularly important in today’s turbulent economic and geopolitical climate.

“The new regime will be particularly challenging for farm businesses which may be asset rich but cash poor. In certain circumstances it may result in beneficiaries having to sell off land or assets to pay IHT liabilities.

“If they haven’t done so already, farm and business owners will need to review their wills and any existing plans for passing on the business. There are a number of options to consider – these may include transferring assets into or out of trust, making gifts of business assets early to benefit from the 7-year gifting rule or arranging insurance cover for the potential IHT charge on death. Every case will be different and will need to take account of specific individual and family circumstances.”

Further changes to the inheritance tax regime are due to come into force in April 2027 when residual pension funds left at death (at any age) will be liable to IHT, as will lump sums from defined benefit pensions.

These funds will form part of the deceased’s estate and be subject to IHT at up to 40%, depending on other assets in the estate and the use of the nil rate band. Once the IHT has been paid, any withdrawals from the pension will also be liable to income tax at the beneficiary’s marginal rate if the deceased was 75 or over. For a 45% rate taxpayer when drawing down the funds this gives a combined income tax and IHT effect tax rate of 67% on the funds at death.