The £2.5 million IHT cap: what business owners must do now
For decades, Business Property Relief was the cornerstone of estate planning for UK business owners. Own a qualifying trading company, hold it for two years, and your shares pass to the next generation free of inheritance tax. No cap, no limit, no questions asked. That era is over.
From April 2026, 100% BPR applies only to the first £2.5 million of qualifying business and agricultural assets per individual. Assets above that threshold attract 50% relief, meaning an effective IHT rate of 20% on the excess. A business owner with £5 million in qualifying assets now faces a potential £500,000 IHT liability that did not exist before.
The transferable allowance between spouses softens the blow for married couples and civil partners. Combined, a couple can shelter up to £5 million at 100% relief. But for sole business owners, unmarried partners, or those with assets significantly above £2.5 million, the new cap demands action.
HMRC estimates that 85% of estates claiming Agricultural Property Relief will pay no additional IHT under the new rules. That statistic is real, but it masks the impact on the 15% that will. These are often the most successful, most complex estates — the ones that need advice most.
The good news: HMRC has extended the interest-free instalment period to 10 years for all BPR and APR qualifying assets. If your estate does face a liability, you can spread the payment without accruing interest. That is a meaningful concession for illiquid estates where the business itself is the primary asset.
What should you do now? Start with a current valuation. If your business is approaching or exceeding £2.5 million, your succession plan needs updating. Trust structures, phased gifting, and life insurance policies written in trust all become more relevant under the new cap.
The distinction between trading and investment activity matters more than ever. BPR only applies to qualifying trading businesses. If your company holds significant cash reserves, investment properties, or non-trading assets, HMRC may challenge your claim. Ensuring your business maintains a predominantly trading profile is essential.
At Stertha Advisory, we specialise in succession planning for business owners and family enterprises. The new £2.5 million cap changes the calculus for thousands of UK businesses. Book a consultation and let us help you protect what you have built.