Agricultural and Business Property Relief
Beyond this, the new cap on Agricultural Property Relief (APR) and Business Property Relief (BPR) at £1 million per estate from April 2026 marks a significant change for family-owned farms and businesses.
Previously, these could be passed on without incurring IHT, regardless of value, but the cap now means that family enterprises exceeding this threshold will be liable for tax. For families who have spent years building generational wealth, these changes may prompt difficult choices, from restructuring to liquidating parts of their assets to cover liabilities.
Investment adjustments
In the realm of investments, the budget also reshaped the tax treatment of AIM shares. While AIM stocks will no longer be fully exempt from IHT, they will now benefit from a reduced tax rate of 20%, rather than the full 40% IHT rate. This partial relief still provides incentive for investors to support smaller UK companies, and the AIM index rallied on news of this new stability.
With interest rates beginning to ease and the economic backdrop settling, there is optimism that the sector could thrive as an attractive option for long-term investors and a meaningful support mechanism for the growth of small businesses.
IHT overhaul on pensions
However, the biggest shakeup is likely the removal of IHT exemptions on pension assets, effective from April 2027. Under previous rules, pensions were a powerful tool for wealth transfer: if someone passed away before age 75, their pension assets could be inherited tax-free. Pensions were also fully exempt from IHT, making them an attractive vehicle for high-net-worth individuals looking to pass wealth down generations. Now, most unused pension funds will fall under IHT. This change means families inheriting larger pension pots will face not only income tax on inherited pensions (if the deceased was over 75), but also an IHT charge.
For many high-net-worth individuals who strategically delayed drawing on pensions to maximise IHT benefits, this move may prompt a rethink, perhaps exploring other tax-efficient strategies like trusts or lifetime gifting.
The shift in pension IHT treatment underscores the government’s goal to return pensions to their primary purpose as retirement vehicles, rather than inheritance planning tools. However, these changes may upend financial plans that were carefully structured around the old rules, adding complexity to the process of accessing pension assets upon a loved one’s death. A consultation on the tax assessment process has been launched, but inheriting pensions is likely to become a longer, more complex process.
Final thoughts
With these changes, seeking professional advice is more important than ever for families with larger estates. By re-evaluating estate plans, including exploring alternative options for transferring wealth, such as gifting or establishing trusts, families can navigate these changes more effectively. For those impacted by the cap on APR and BPR, restructuring business assets may be necessary to ensure wealth is passed down as intended.
Labour’s first budget has underscored the importance of proactive planning in preserving family wealth, especially given the evolving tax environment. For families hoping to maintain their legacies, adapting to these new IHT rules is essential. By working closely with financial advisers, individuals can better protect their estates, optimising inheritance plans to reduce potential tax liabilities and secure wealth for future generations.
Inheritance tax planning is not regulated by the Financial Conduct Authority.
