Draft inheritance tax legislation clarifies question over transferable allowance

Farmers and business owners are being urged to urgently check their wills after draft legislation published on Monday confirms that from April 2026, the proposed 100% inheritance relief available for the first £1m of qualifying business or agricultural assets will not be transferable.

From April 2026, changes to the inheritance tax regime will mean that the first £1m of combined agricultural and business property will continue to receive 100% relief from inheritance tax, with 50% relief on amounts over £1m. Each person will have the £1m allowance.

The current spousal exemption remains unchanged, so qualifying assets can pass to a UK, long-term resident spouse free of IHT during lifetime or on death.

However, some were hoping that today’s draft legislation would align with the current rules for the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) – whereby any allowance that is unused when someone dies can go to their spouse or civil partner’s estate when they die – but this hasn’t happened.

This means that a business owner leaving their qualifying assets to a surviving spouse would not create an IHT charge because of the spousal transfer rules. But the spouse leaving qualifying assets to their children would only benefit from a £1m allowance rather than a £2m allowance.

Elsa Littlewood, a tax partner at BDO said, “Many families were hoping that the draft legislation would allow for the £1m allowance to be transferable, bringing this into line with the rules on the nil-rate band and residence nil-rate band.

“Monday’s draft legislation confirms that this hasn’t happened. Unfortunately, this will add further complication to an already complex inheritance tax regime and may penalise the unwary.

“Many business owners and farmers have already taken advice on passing their business or farming assets on to the next generation. Whereas previously this was a relatively simple process from a tax perspective, that is no longer the case.

“Some business owners have opted to make a lifetime transfer of business assets to a spouse free of IHT. This can help ensure that each spouse holds £1m of qualifying assets once the required two-year ownership period is established.

“Others have chosen to set up a trust for the surviving spouse with a life interest in the business assets only, to give certainty of the ultimate beneficial recipients of the assets. However, families need to check that this is a tax efficient option.

“Most importantly, people need to check their wills to make sure that they’re up to date and take account of these imminent changes.

“The only slight silver lining in today’s update is that the £1m allowance will be uprated in line with inflation from April 2030 onwards.”