Inheritance Tax Update: £2.5m APR & BPR Threshold – Opportunities and Pitfalls

On 23 December, the Government confirmed a significant reform to Inheritance Tax (IHT) reliefs for business owners and farmers, increasing the value of assets eligible for full Agricultural Property Relief (APR) and Business Property Relief (BPR) to £2.5 million. The changes will take effect from 6 April 2026.

While the increased threshold is welcome, the announcement came too late for some individuals who have already incurred substantial tax planning costs that may now prove unnecessary. The reforms also introduce new planning considerations that should not be overlooked.

So What Are APR and BPR?

Agricultural Property Relief (APR) can reduce IHT on qualifying agricultural land, buildings, and farmhouses by up to 100%.

Business Property Relief (BPR) provides similar relief for qualifying business assets, including shares in unquoted trading companies and certain business premises.

Under the revised rules, the first £2.5 million of qualifying APR/BPR assets will attract 100% relief. Any qualifying value above £2.5 million will receive 50% relief, resulting in an effective IHT rate of up to 20% on the excess.

The Standard Nil-Rate Band (£325,000)

In addition to APR and BPR, every individual is entitled to a standard IHT nil-rate band of £325,000. This allowance can be set against assets not covered by APR or BPR, such as cash, investments, or a private residence.

Like the APR/BPR allowance, the £325,000 nil-rate band is transferable between spouses or civil partners. In practice, this means a married couple may be able to pass on up to £650,000 of non-relieved assets free of inheritance tax, provided the allowance is unused on the first death.

However, while the nil-rate band reduces the taxable value of an estate, it does not reduce the value of the estate when assessing eligibility for other reliefs, most notably the Residence Nil-Rate Band.

Transferability Between Spouses

As with the standard nil-rate band, the £2.5 million APR/BPR allowance will be transferable between spouses or civil partners.

In practice, this means a couple could potentially pass on up to £5 million of qualifying business or agricultural assets with full IHT relief, provided the allowance is unused on the first death.

While marrying purely for tax reasons is rarely recommended, this change significantly enhances succession planning flexibility for family-run farms and businesses.

Interaction with the Residence Nil-Rate Band (RNRB)

One of the most important and often overlooked issues is how APR and BPR interact with the Residence Nil-Rate Band (RNRB). The RNRB is an additional inheritance tax allowance available where a qualifying residential property is left to direct descendants, such as children or grandchildren.

Currently set at up to £175,000 per person, the RNRB is tapered once an estate exceeds £2 million, reducing by £1 for every £2 above that threshold. Importantly, the £2 million test is applied before any APR, BPR, or the £325,000 nil-rate band are taken into account.

As a result, estates with significant business or agricultural assets can lose the RNRB entirely, even where inheritance tax on those assets is otherwise eliminated.

Example

An individual dies with an estate valued at £2.5 million, comprising £2.1 million of qualifying agricultural assets and a £400,000 family home.

Although the agricultural assets qualify for 100% APR and the estate also benefits from the £325,000 standard nil-rate band, the total estate value for RNRB purposes remains £2.5 million. This exceeds the £2 million taper threshold by £500,000, resulting in a full loss of the Residence Nil-Rate Band.

As a result, no residential relief is available against the family home, a surprise outcome for many farming and business families.

What This Means

Who benefits most?

• Small to medium-sized farms and trading businesses valued below £2.5 million

• Married couples able to utilise transferable allowances

• Families planning long-term succession rather than immediate disposal

Where caution is needed

• Estates approaching or exceeding £2 million, due to potential loss of the RNRB

• Clients with high-value farmhouses or mixed-use properties

• Business owners assuming BPR preserves access to residential relief

• Estates where non-relieved assets exceed the £325,000 nil-rate band

Planning Considerations

In light of these changes, clients should consider reviewing total estate values rather than just taxable values, reassessing succession and ownership structures, considering lifetime gifting strategies where appropriate, and ensuring wills and estate plans properly reflect the interaction between APR, BPR, the nil-rate band, and the Residence Nil-Rate Band.

Conclusion

The increase in the APR and BPR threshold to £2.5 million is a positive development for family businesses and farms, reducing inheritance tax exposure for many. However, it does not remove the need for careful planning.

In particular, the potential loss of the Residence Nil-Rate Band for estates exceeding £2 million can materially affect outcomes, even where APR, BPR and the £325,000 nil-rate band significantly reduce or eliminate the inheritance tax charge.

Early review and tailored advice remain essential to ensure reliefs are maximised and unintended consequences avoided.