The £1m allowance for business property relief

Stephanie Webber, ACA CTA, Senior technical writer, Croner-i

With major changes to inheritance tax for owner managed businesses due in less than a year and no final legislation yet, Stephanie Webber ACA CTA, senior technical writer at Croner-i, explains what we know so far, raising questions about the position of chargeable transfers.

With effect from 6 April 2026, it is expected that the total (combined) value of business and agricultural property qualifying for relief at 100% will be limited to £1m, with the balance eligible for relief at only 50%.

The changes were described in a policy paper published at Autumn Budget 2024, with further clarification in a limited consultation document on the interaction of the changes on trusts launched in February 2025.

This article examines how the inheritance tax (IHT) change is likely to affect transfers of business (and agricultural) property made both before and after 6 April 2026, also indicating which of the proposed changes are subject to consultation and therefore may be more susceptible to amendment.

Estate on death

It is proposed that business and agricultural property included in a person’s estate (deaths on or after 6 April 2026) will be subject to a £1m limit that will operate as an allowance available to the individual.

A £1m allowance will also be available to trustees of relevant property trusts, see below.

According to both the policy paper published on 30 October 2024 and subsequent consultation in February 2025:

• the allowance only applies to property that is eligible for relief at 100% (referred to in the consultation document as ‘qualifying agricultural and business property’. For the purposes of this article, the terms ‘qualifying agricultural property’ and ‘qualifying business property’ will be used to denote property potentially eligible for 100% relief). Other categories of business or agricultural property that would be relieved at 50% do not count towards the £1m;

• it applies across the entire IHT estate (including property that does not pass under the will, such as settled property and property subject to a reservation), apportioned where necessary across all qualifying property; and

• the limit applies per individual, so that spouses and civil partners both benefit from a separate £1m allowance (and there is no proposal to allow the transfer of unused allowance).

None of the above matters are included in the consultation questions and it therefore seems unlikely that the government will change their stance.

Example

Amelia died in May 2027. Her estate included unquoted trading company shares (not traded on AIM) worth £900,000 and a freehold property owned personally and used by the trading company worth £400,000.

She was also entitled to an interest in possession in a settlement created under her late husband’s will that holds shares (also in the unquoted trading company) worth £700,000.

Amelia has made no lifetime transfers of either business or agricultural property. She has also remarried and her husband is still alive. It is assumed that both the trading company shares and freehold property are relevant business property.

As Amelia’s interest in the settlement is an immediate post-death interest, it is included in her estate.

The value of the ‘qualifying business property’ is therefore £900,000 + £700,000 = £1.6m (although the freehold property is relevant business property, it is only eligible for relief at 50%). The £1m allowance is therefore exceeded. It is apportioned rateably to the shares held personally and in the settlement.

The balance is eligible for relief at 50%. Therefore, for the shares held personally, relief is available at 100% on £562,500 and at 50% on the balance of £337,500. Relief is available at 50% on the freehold property. For the shares held in the settlement, relief is available at 100% on £437,500 and at 50% on the balance of £262,500.

However, Amelia will only be able to use her £1m allowance if she leaves sufficient ‘qualifying business property’ to someone other than her spouse. If all of the business property passes to her spouse, although he will have his own £1m allowance and will also be able to aggregate her period of ownership for the purposes of the minimum period of ownership condition (see IHTA 1984, s108), the benefit of one of their allowances will be wasted as it is not transferable.

Failed PETs and chargeable lifetime transfers

When applying the £1m allowance on a person’s death, any potentially exempt transfers (PETs) and chargeable lifetime transfers in the previous seven years are also taken into account.

Similarly, chargeable lifetime transfers are subject to the £1m allowance, and also take into account previous chargeable transfers in the last seven years. (The operation of the £1m allowance over the seven-year period is not one of the consultation questions.)

Example

Benjamin died in January 2035, when his estate included ‘qualifying business property’ worth £1.2m. He has made previous transfers of qualifying business property as follows:

• 1 May 2027, to a discretionary trust £800,000;

• 1 May 2030, to his son £600,000.

The transfer on 1 May 2027 is a chargeable transfer. At the time it was made, it was less than the £1m allowance and therefore 100% business property relief applied. No further tax became payable in consequence of the death as more than seven years had elapsed.

The transfer on 1 May 2030 is a failed PET. £800,000 of the £1m allowance was used by the chargeable transfer (May 2027) within the previous seven years and therefore relief at 100% is only available up to £200,000, with the balance eligible for relief at 50%.

On the date of death in January 2035, failed PETs and chargeable transfers in the previous seven years that have used the £1m allowance are taken into account in calculating the business property relief due on property included in the estate.  

The chargeable transfer on 1 May 2027 is outside the seven-year period and therefore only £200,000 has been used (by the failed PET in May 2030) and qualifying business property in the estate of £800,000 can be relieved at 100%, with the balance relieved at 50%.

Transfers during the transitional period

PETs and chargeable lifetime transfers made before 30 October 2024 are subject to the rules applicable at the time they were made and therefore there is no limit on the amount of 100% business or agricultural property relief that is available, nor will they be treated as using up any of the £1m allowance.

However, if a lifetime transfer of qualifying business or agricultural property is made on or after 30 October 2024 and before 6 April 2026 (the transitional period) and the donor dies within seven years, it will be subject to the £1m limit (and the allowance available for subsequent transfers will be reduced) unless the death is before 6 April 2026.

Although the consultation document asks for views on the treatment of qualifying business and agricultural property settled during the transitional period, it is not clear whether the treatment of PETs and chargeable transfers is also subject to consultation.

Example 1

Charles gave his son qualifying business property worth £700,000 on 1 July 2025. He dies on 1 June 2028, leaving further qualifying business property worth £800,000.

Although the PET on 1 July 2025 occurs before the new rules come into force, it is during the transitional period and Charles’ death is after 5 April 2026.

The PET is a failed PET because it is within seven years of death and therefore it will use up £700,000 of the £1m allowance, with the result that only £300,000 of the qualifying business property in Charles’ estate is eligible for 100% relief, with the balance only eligible for relief at 50%.

Example 2

David transferred qualifying business property worth £1.2m to a relevant property trust on 1 July 2025. On 1 June 2028, he gave further qualifying business property worth £800,000 to his son. He died on 1 June 2033.

The transfer on 1 July 2025 is a chargeable lifetime transfer. At the time it was made, it would have been eligible for 100% relief without restriction and therefore no tax would be payable.

Clearly it is more than seven years before the death and therefore there is no question of further tax becoming payable as a result of death.

However, the transfer took place in the transitional period, David died after 5 April 2026 and it was also within the seven years before the failed PET on 1 June 2028.

Fortunately, the consultation document makes clear that, where the settlor survives at least seven years after a chargeable transfer during the transitional period, it will not be brought into the cumulation for the purposes of establishing how much of the £1m allowance is available for subsequent chargeable transfers and therefore the failed PET will be covered by 100% relief.

Relevant property trusts

Where a relevant property trust is created on or after 6 April 2026, the trustees will have their own £1m allowance but, unlike the allowance applicable to individuals, it will be applied over a 10-year rather than seven-year period.

The consequence is that any business or agricultural property that is subject to an exit charge either before the trust’s first 10-year anniversary or between 10-year anniversaries will reduce the £1m allowance for the purposes of the subsequent 10-year charge.

However, there are three further proposals (all are subject to consultation):

• for multiple trusts created on or after 30 October 2024 by the same settlor, the £1m allowance will be split between the trusts (and unused amounts cannot be transferred between trusts). Trusts already in existence will not be affected (even if the settlor subsequently creates further trusts on or after 30 October 2024);

• a related property rule will be introduced from 6 April 2026 that will value qualifying agricultural or business property settled by the same settlor on different trusts as if the property in each trust was part of the larger combined holding (where this produces a higher value) for the purposes of exit or 10-year charges.

There is currently no suggestion that property owned by the settlor (or spouse or civil partner) personally will also be taken into account for the purposes of charges within the trust (although clearly it is relevant when calculating the tax due when the property first enters the trust);

• there will be a change to the rules for calculation of exit charges that take place after the first 10-year anniversary. Currently tax is calculated by using the rate that applied at the previous anniversary, adjusted for the length of time that has elapsed since the anniversary (and, where necessary, for property added subsequently).

The proposed change will only affect property leaving the trust that is not covered by 100% business or agricultural relief, but will increase the rate of tax that applies to such property by recalculating the previous 10-year charge rate disregarding business or agricultural property relief.

Transitional rules for relevant property trusts

The main transitional proposals are that, for trusts created before 30 October 2024, the new rules will only be applied from the first 10-year anniversary falling on or after 6 April 2026.

Thus it should be possible for any qualifying business or agricultural property to be extracted from the trust tax-free at any time before that anniversary, as relief at 100% will not be subject to the £1m allowance (and this will also not reduce the allowance available to the trustees in relation to any property that remains within the trust).

For trusts created between 30 October 2024 and 5 April 2026, any qualifying business or agricultural property leaving the trust before 6 April 2026 will not be subject to the £1m allowance and will also not reduce the allowance available for transfers on or after that date.

In either case, when calculating the first post 5 April 2026 10-year charge, the £1m allowance will only apply to complete quarters falling on or after that date. (Note, however, that all of the transitional rules for trusts are subject to consultation.)

Instalment option

The consultation document also confirms that, from 6 April 2026, all business or agricultural property that is eligible for relief at either 100% or 50% will be eligible for payment by interest-free instalments over 10 years.

Conclusion

The summary above is based on information in the Autumn Budget policy paper and the subsequent consultation. However, until the draft legislation is available, inevitably some questions remain.

For example, currently both business and agricultural property relief operate to reduce the value transferred by a transfer of value, rather than reducing a chargeable transfer, which means that they can be applied to reduce the value transferred by a PET that never becomes chargeable.

It is assumed that the new legislation will be drafted to make it clear that a PET that never becomes chargeable does not reduce the £1m allowance, although this has not been specifically addressed in either document.

The consultation launched in February 2025 and closed on 23 April. The next steps are for draft legislation to be published and a further technical consultation carried out later this year.