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Overview of inheritance tax in the UK

Inheritance tax is a tax charged on the estate of someone who has died. Tax is charged at a 40% rate if the estate exceeds a threshold, known as the nil-rate band, set at £325,000. There are several important reliefs, such as the spousal relief, in addition to the nil-rate band. An inheritance tax relief increases the tax-free threshold, or reduces the value of an asset, therefore reducing the amount of tax payable.

Among these reliefs, Agricultural Property Relief (APR) and Business Property Relief (BPR) allow estates to reduce the value of eligible agricultural or business property for inheritance tax. Depending on certain criteria, it is available at a 100% or 50% rate. 100% relief means that the entire asset is exempt from inheritance tax. Currently, there is no cap as to how much wealth can be exempted from inheritance tax through these reliefs. APR and BPR cannot be claimed on the same asset but operate independently of each other.

Inheritance tax statistics

In 2021/22, 1,730 estates claimed APR and 4,170 estates claimed BPR. In the same year, APR cost the Treasury around £0.6 billion and BPR cost around £1.1 billion. The majority of the cost of the reliefs goes to claims for assets worth over £1 million.

Changes announced at Autumn Budget 2024

The Labour government announced at the Autumn 2024 Budget that, from April 2026, the availability of 100% relief for agricultural and business property would be capped. Assets eligible for 100% APR and those eligible for 100% BPR would qualify for full relief up to a sum of £1 million. 50% relief would apply thereafter. The government is proposing to make assets eligible for BPR and APR (added together) count towards the £1 million cap.  

The change is forecast to raise around £0.5 billion a year, after allowance is made for people taking steps to reduce their liability. For instance, it’s expected that there will be an increase in the use of spouse exemption by married estates.

Analysis and reaction

The government has said that a majority of estates claiming APR and BPR will not be affected by these changes, which are intended to target a wealthy minority of estates.

HM Revenue and Customs (HMRC) has estimated that around 2,000 estates will pay more tax following the policy change. HMRC has also pointed out that these are ‘static’ estimates, meaning they do not take into account behavioural responses.

The Office for Budget Responsibility (OBR) said the projected revenue from this policy would be £0.5 billion a year from 2027/28. The OBR added this estimate was highly uncertain because of potential behavioural responses from potential taxpayers.

The OBR’s focus was on the effect of the policy on government receipts. It has therefore not looked at the number of estates potentially affected by the policy.

Reaction

Members of opposition parties have reacted negatively to the announcement, which has been a topic of sustained debate in the House of Commons since the Budget. Among other parliamentary activities, it has been subject of an opposition day debate and two urgent questions (on 4 November 2024 and 23 January 2025). The Environment, Food, and Rural Affairs Select Committee also dedicated two oral evidence sessions to this topic in its inquiry on the future of farming.

Some economic think tanks, like the Institute for Fiscal Studies (IFS), broadly agree with the reforms. The IFS’ position is that assets should broadly be taxed in a similar way, and by giving special treatment to agricultural and business property, then the tax system favours certain types of assets over others.

Agricultural organisations, such as the Country Land and Business Association have argued that these reforms would have a negative impact on farming businesses, and could affect around 70,000 farms.

The Institute for Fiscal Studies (IFS) think tank has explained that estimates can differ without implying only one of them is correct. This is because data coming from HMRC relates to the number of taxpaying estates, and data from other organisations relates to farms and farming businesses. As the IFS explains, “one estate could include only a share of a farm and/or could include multiple farms.” Additionally, there is debate over how to define the term ‘affected’, with some (such as agricultural estate and succession planning lawyer Stuart Maggs) arguing that those who would have to intervene in their tax planning to avoid a tax charge should count as ‘affected’.


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