It’s fair to say this was unwelcome news for many business owners and farmers. However, there are still some positives worth keeping in mind, the first of which being the surprise announcement on 23 December 2025 to uplift the threshold to £2.5m.

Relief still applies above the £2.5m cap

Even where assets exceed the £2.5m limit, partial relief still applies. The excess value is charged to Inheritance Tax (IHT) at half the usual rate — 20% for individuals (rather than 40%), and 3% for trusts (rather than 6%).

While this isn’t as generous as before the 2024 Autumn Budget, these partial reliefs can still provide substantial tax savings where estates exceed the new cap.

The Balfour principle still stands

There’s more good news: the long-standing ‘Balfour Matrix’ remains unchanged.

In simple terms, this principle says that if a business is mainly trading (more than 50% of its activities), it will qualify for BPR as a whole — even if part of the business involves activities that are not usually eligible, such as property rental or investment.

How does it work?

HMRC looks at several factors to decide whether a business is mainly trading, including:

• The nature of its income and turnover
  
• Where profits come from
  
• How assets/capital is used
  
• How directors and employees spend their time

All these factors are considered “in the round.” Think of it as a balancing act — with trading activities on one side of the scales and non-trading activities on the other. If the trading side outweighs the rest, the business should qualify for BPR.

For example, a family farming business which consists of a mixture of farming and property rental activities could still qualify, provided most of its operations, time, and resources are focused on farming.

However, it’s not as simple as adding up the number of indicators pointing towards trading. Each factor will carry a different weight depending on the nature of the business. In an asset- rich business, for example, the assets test will be a particularly key measure.

For well-diversified agricultural businesses, it is common for the profit measure to point the “wrong way” on the scales while turnover points the “right way.” In such cases, asset valuation and capital deployment often become decisive. Even so, the outcome will depend on the overall balance of factors, and there are no absolute rules.

Watch out for ‘excepted assets’

Once a business qualifies for BPR, there’s one more step: checking for excepted assets. These are assets that haven’t been used in the business in the last two years and aren’t needed for future business use.

Common examples include large cash balances or investments sitting idle in a company. However, if the business can show that cash is needed for working capital or upcoming investment, HMRC will often accept that it is not an excepted asset.

Why it still matters

Despite the new £2.5m cap, the Balfour principle continues to offer valuable planning opportunities for businesses and farming families. With careful management and documentation, it’s still possible to achieve meaningful inheritance tax savings and protect the value of your business for future generations.

If you would like to discuss how these changes could affect you and what steps you can take to protect your estate, please get in touch.