What the £1m IHT Relief Cap Means for Estates

Currently, business and agricultural assets that qualify for relief can be passed on free of IHT, regardless of their value. This has allowed families to hand down farms and trading businesses without incurring significant tax liabilities. From 2026, however, the amount of qualifying property that can benefit from full relief will be capped at £1 million. Any eligible property above this threshold will still receive relief but only at a reduced rate of 50%. The implications of this are substantial. For example, if a business is valued at £5 million, this change could result in an additional IHT liability of £800,000.

The new allowance will apply to both lifetime transfers made within seven years of death and transfers made on death. Like the existing nil-rate band of £325,000, the £1 million allowance will renew every seven years on a rolling basis. Not all assets will count against the allowance. Business or agricultural property that only qualifies for 50% relief, such as Alternative Investment Market (AIM) shares, will not use up the £1 million threshold. While each spouse or civil partner will be entitled to their own £1 million allowance, there will be no facility to transfer any unused amount to a surviving partner, unlike the current nil-rate band rules.

This shift is likely to change how families approach succession and estate planning. Up until now, the focus has largely been on ensuring assets qualify for relief. With this cap in place, the emphasis will increasingly be on making full use of the allowance during one’s lifetime, especially where the value of qualifying assets exceeds the threshold. This could mean more people considering lifetime gifts, which may help reduce their taxable estate but could give rise to capital gains tax considerations.

There may also be value in placing high-value assets, such as agricultural land, into trust. For example, the lifetime IHT payable on a £2 million gift of agricultural property into trust could be just £35,000, depending on the circumstances. It’s also worth noting that if business or agricultural property is transferred to a spouse or civil partner during lifetime, it must be held for at least two years before it becomes eligible for relief.

Nicola Massey, Partner and Agriculture specialist, commented: “These changes are a clear signal that HMRC is tightening the rules on IHT reliefs that have, until now, offered generous exemptions. While the reliefs are still valuable, the introduction of a cap means that business owners and farming families need to revisit their estate plans with care. Leaving it too late could result in unintended tax liabilities for the next generation.”

HMRC has published a series of six case studies in Annex A of the consultation to illustrate how the new allowance might apply in different situations. These examples provide useful insight for anyone seeking to understand the practical impact of the changes. You can read the consultation document and view the case studies on HMRC’s website here.