Inheritance tax U-turn: New £2.5m limit and ‘death tax’ loopholes to use before April | Personal Finance | Finance

Farmers and landowners across the UK are being urged to take action before April to protect against inheritance tax changes.

In December last year, the Government announced that the level of the Agricultural and Business Property Reliefs threshold will be increased from £1 million to £2.5 million from April 6, 2026, which will allow spouses or civil partners to pass on up to £5 million in qualifying agricultural or business assets between them before paying inheritance tax, on top of existing allowances. Above that allowance, farmers will get 50% relief on qualifying assets and will pay a reduced effective rate of up to 20%, rather than the standard 40%.

According to the Department for Environment, Food and Rural Affairs (Defra), raising the threshold will significantly reduce the number of farms and business owners facing higher inheritance tax bills and will ensure that only the largest estates are affected.

Under Labour’s initial proposal, the full 100% relief was to be restricted to the first £1 million of property, but the change means the number of estates facing higher inheritance tax will be reduced from around 2,000 under the original plans to up to 1,100, hitting only the largest farms.

Announcing the tax relief threshold hike in December, Environment Secretary Emma Reynolds said: ”Farmers are at the heart of our food security and environmental stewardship, and I am determined to work with them to secure a profitable future for British farming.

“We have listened closely to farmers across the country, and we are making changes today to protect more ordinary family farms. We are increasing the individual threshold from £1 million to £2.5 million, which means couples with estates of up to £5 million will now pay no inheritance tax on their estates.

“It’s only right that larger estates contribute more, while we back the farms and trading businesses that are the backbone of Britain’s rural communities.”

Ahead of the changes on April 6, financial experts are urging farmers and landowners to take action to protect their estates and ensure they are appropriately structured for the new rules, including considering gifting assets to secure the current 100% relief.

Financial experts at the BDO accountancy firm said: “Gifts and settlements you make from October 30, 2024, up to April 5, 2026, initially fall under the current rules, so, in most cases, they can be made without a lifetime IHT charge. 

“However, if you die after April 5, 2026, and death is within seven years of that transfer, any resulting IHT liability will be calculated by reference to the new rules.

“In comparison, transfers made after April 2026 will fall completely under the new rules, and so lifetime IHT would be due on gifts, such as settling trusts, where the value exceeds £2.5m plus any IHT NRB available. There would also be potential IHT on death within seven years.”

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Farmers and landowners are also advised to review and potentially restructure their ownership to ensure farms are jointly owned, as this would utilise both spouses’ allowances, to review and update wills, and potentially set up trusts before April 6.

Financial experts at Saffery said: “Some individuals may consider transferring £2.5 million of qualifying property into trust now (potentially with £325,000 of non-qualifying property if their nil rate band is available) in order to start the seven-year cycle.

“It will also become increasingly important to consider how asset ownership is structured and whether planning mechanisms and other reliefs, such as Conditional Exemption and Woodlands Relief, apply.”