What changes were made to BPR and APR in the Budget?

The 'current rules'

Until 30 October, anyone holding an asset on death, or who had given one away in the seven years before death, or to a trust, would not suffer an Inheritance Tax liability (IHT) if the asset fully qualified for 100% BPR or 100% APR (assuming the clawback rules did not apply in respect of gifted assets). 

100% relief applies to most agricultural assets and to most business interests, including shares held for at least two years in a private company that was wholly or mainly a trading company / group. There was no cap on the amount of relief that could be claimed

The ‘new rules’

From 6 April 2026, a new £1M combined APR and BPR allowance will be introduced, whereby 100% relief will only be available for the first £1M of qualifying assets. Any qualifying assets in excess of this allowance will be taxed at an effective rate of 20% (being half the normal 40% IHT rate). The tax can be paid in instalments over 10 years, but we expect it’s likely that interest will be charged if the instalment payment is late.

The £1M allowance applies per person, so a married couple could potentially have a combined allowance of £2M. Added to this, both spouses will have their ordinary ‘nil rate bands’ of £325K each and, potentially, a further 'residence nil rate band’ of £175K each (provided that the conditions are met), giving them total combined allowances of up to £3M to set against their IHT estate (albeit for estates above £2M, there is a reduction in the residence nil rate band that can be claimed).

Do the ‘current rules’ still apply between now and 5 April 2026?

In theory yes, but there is a sting in the tail.

For any gifts made between 30 October 2024 and 5 April 2026, the 'current rules' will apply at the time the gift is made. So, if a gift is made to a trust (a ‘chargeable lifetime transfer’) in this period, then no IHT will arise at that point if the assets fully qualify. But if the donor dies within seven years of the gift and after 5 April 2026, the ‘new rules’ will apply to that gift and to any assets held on death.

However, if the donor dies by 5 April 2026, the current rules will continue to apply to both the gift and to assets held on death.

Do the 'new rules' affect gifts made before the Budget?

No. The changes were not retrospective. The ‘clawback rules’ still need to be considered though, so for example, if the transferor dies within seven years and at that time the transferee no longer owns the asset, then BPR/APR may not be available.

What tax planning can be carried out?

Hold on to it?

Holding on to qualifying assets worth around £1M until death could enable them to be passed on in a tax efficient way.

This is because assets held on death are 'rebased’ to market value, which effectively wipes out the capital gain on the asset. So if a business is worth around £1M, the beneficiary would inherit it IHT free and could potentially sell it soon afterwards without suffering Capital Gains Tax (CGT) either.

Any qualifying assets retained in the estate above the £1M allowance would be charged to IHT at 20%, and the beneficiary would inherit at market value. With the top CGT rate being 24%, if the beneficiary is planning to sell and, if original acquisition costs were very low, it may be tax effective to pass on those assets at death rather than by means of a lifetime gift.

As the allowance isn’t expected to be transferable between spouses, wills would need to be revisited to ensure that this is not lost on first death (and, potentially, to prioritise the spousal exemption on the first death, even for business and agricultural property, where appropriate). There may also be a need to rebalance the assets between spouses to ensure both are able to fully use their £1M allowance.

Give it to family members?

For those with qualifying assets over the £1M allowance, gifting may seem like an attractive option. But when making a gift, both CGT (on the uplift in value of the asset since acquisition) and IHT charges could potentially apply.

For gifts of ‘trading’ assets to individuals, a ‘S165 holdover’ election can potentially be made so that no CGT arises at the time of the gift. However, it is not possible to holdover investment gains, and so, for example, if shares are given away in a company that is ‘mainly trading’ but also has investment assets, a CGT charge is likely to arise on the proportion relating to the investment.

For IHT purposes, no IHT will arise if the donor dies more than seven years after the gift. But if they die within seven years and the gift exceeds their allowances, IHT will become due (with the IHT rate decreasing gradually each year once they have survived three years by virtue of “taper relief”).

Therefore, those with qualifying assets over the £1M allowance could consider gifting earlier than they may have originally intended in order to start the seven-year IHT clock. This will be particularly attractive where S165 holdover relief applies because neither CGT nor IHT will be payable at that point.

Give it to a trust?

For gifts to trusts, a different type of CGT holdover election can be made (S260), which enables both investment and trading assets to be gifted without a CGT charge.

But if the asset given to the trust does not fully qualify for an IHT relief, IHT will be payable (at 20%, with a further 20% payable if they die within seven years).

As gifts between now and April 2026 should still get 100% APR/BPR at the point of transfer, considering gifts into trusts is imperative during this window because this can still potentially be done without suffering either IHT or CGT. Provided the donor survives seven years (or dies before 6 April 2026), no IHT will become due on the gift, and no CGT will be payable either.

Use a corporate structure?

The Balfour case established that assets that would not qualify for BPR in their own right could potentially qualify if they form part of a business that is 'mainly trading.’ This remains a tax effective way of shielding investment assets from IHT, even where the £1M allowance is exceeded, albeit that post April 2026 this would give a 50% IHT saving rather than a full one.

Using a corporate structure to hold the assets can be a clean way of achieving this, particularly if the shares are then given into trust before April 2026 to ‘bank’ 100% BPR whilst it is still available. In such cases, an existing dormant company could prove useful for this purpose to ensure the two-year ownership test is met.

Having a company in place also potentially enables minority interest discounts to be applied when looking at share values and may prove helpful when looking at values for the new £1M allowance.

Using a company would also enable business owners to give away ‘growth shares’ to their descendants so that the increase in value of the company falls outside their IHT estate. There will normally be some value in that gift, but this is likely to be substantially less than a gift of ordinary shares, and so it can be a tax efficient way of passing on wealth.

Sell?

As the CGT increases announced in the Budget were not as bad as envisaged, bearing in mind the new BPR/APR restrictions and the phasing out of the 10% ’BADR’ CGT rate for trading assets from April 2025, this will undoubtedly persuade some family businesses to consider selling sooner than perhaps originally planned.

Summary

Whilst claiming 100% BPR/APR relief will undoubtedly be more challenging in the future, there are still actions that can be taken to maximise the allowances available and mitigate IHT liabilities, and particularly so in the period between now and April 2026.

Please note that at the time of writing we are awaiting the legislation to be issued. If you have any questions about the above or would like more information specific to your circumstances, please get in touch.