Agricultural Property Relief Reform 2026 UK: The £1 Million Cap, Impact on Farming Estates and Planning

The Finance Act 2026 (FA 2026) made the most significant change to Agricultural Property Relief (APR) since the relief was introduced in its modern form by the Inheritance Tax Act 1984. The reform took effect on 6 April 2026. WHAT CHANGED: before FA 2026, qualifying agricultural property attracted 100% APR (full exemption from IHT) with no upper limit. A farm worth £10 million could, if qualifying conditions were met, be completely exempt from the 40% IHT charge. From 6 April 2026, the 100% rate of APR is capped. Only the first £1 million of combined APR (at 100%) and BPR (at 100%) assets is eligible for the full exemption. Above £1 million of combined qualifying relief, the rate falls to 50% — meaning the agricultural value of the excess is reduced by 50% before the 40% IHT rate is applied. The effective rate of IHT on the excess is therefore 20% (50% × 40%). WHAT HAS NOT CHANGED: the fundamental conditions for APR eligibility under IHTA 1984 ss.115-124 are unchanged. The required occupation period (2 years owner-occupied; 7 years let to a tenant), the definition of 'agricultural property', the treatment of farmhouses, and the 'agricultural value' concept are all preserved. The reform affects only the rate applied above the new £1m threshold. THE COMBINED ALLOWANCE: the £1 million threshold is shared between APR and BPR. It is not £1m APR plus £1m BPR — it is £1m total across both reliefs at the 100% rate. If an estate has £600,000 of qualifying APR assets and £700,000 of qualifying BPR assets (total £1.3m), only the first £1m attracts 100% relief; the remaining £300,000 attracts 50% relief.

The qualifying conditions for APR are set out in IHTA 1984 ss.115-124 and are unchanged by FA 2026. The reform affects the rate of relief, not who qualifies. The conditions are: (1) DEFINITION OF AGRICULTURAL PROPERTY (s.115(2)): 'agricultural property' means agricultural land or pasture; woodland or any building occupied with and subsidiary to any such land; any building used in connection with the intensive rearing of livestock or fish if the land on which the building is situated is agricultural land or pasture; cottages, farm buildings and farmhouses occupied with agricultural land; and stud farms if the breeding and rearing of horses on them is within HMRC's definition. LAND AND BUILDINGS MUST BE IN THE UK, CHANNEL ISLANDS OR ISLE OF MAN; (2) AGRICULTURAL VALUE (s.115(3)): APR is given only on the 'agricultural value' of the property — the value it would have if restricted to agricultural use. If there is 'hope value' (development potential) or non-agricultural value, APR does not extend to that portion. The excess over agricultural value may qualify for BPR if it is part of a trading farming business; (3) OCCUPATION FOR AGRICULTURE (ss.116-117): RATE A (100% relief, unaffected by reform up to £1m): property occupied by the transferor (or their spouse/civil partner) for the purposes of agriculture throughout the period of 2 years ending with the transfer, OR owned by the transferor for 7 years ending with the transfer and occupied by another person for the purposes of agriculture throughout that period; RATE B (50% relief): property that does not meet the Rate A occupation test but has been owned for 7 years. Note: Rate B was already 50% before the FA 2026 reform, so is unaffected by the cap — the cap only reduces Rate A assets above £1m from 100% to 50%; (4) FARMHOUSES (s.115(2)): HMRC applies a 'character appropriate' test — the farmhouse must be of a character appropriate to the property (Rosser v IRC [2003]; McKenna v IRC [2006]). A large country house on a small working farm may fail the test; a working farmhouse used by the farmer is generally appropriate. The character appropriate test is unchanged; (5) MINIMUM OWNERSHIP: no explicit minimum period for Rate A (owner-occupied) beyond the 2-year occupation test; 7 years for Rate B (let to tenant). Inherited property: where property was inherited, the prior ownership period of the deceased can be aggregated (s.120). Similarly for transfers between spouses (s.121).

The £1 million allowance is a single pool shared across both APR (at 100%) and BPR (at 100%) assets on death. It does NOT give £1m APR plus £1m BPR separately. EXAMPLE 1 — PURE APR ESTATE: Margaret dies owning a working farm with agricultural value of £2.5 million (owner-occupied, Rate A). Before FA 2026: 100% APR on full £2.5m = £0 IHT. After FA 2026: first £1m at 100% APR = £0 IHT; remaining £1.5m at 50% APR → £750,000 not relieved → IHT at 40% = £300,000. EXAMPLE 2 — MIXED APR/BPR ESTATE: David dies owning: farm (agricultural value) £800,000 + qualifying unquoted trading company shares £600,000. Total qualifying assets = £1.4m. Allowance allocation: (a) APR £800,000 uses £800,000 of the £1m allowance at 100%; (b) BPR shares: first £200,000 uses the remaining £200,000 allowance at 100%; remaining £400,000 BPR shares at 50% → £200,000 not relieved → IHT at 40% = £80,000. EXAMPLE 3 — TENANTED FARM (RATE B, ALREADY 50%): A tenanted farm with agricultural value of £3m that qualified only for Rate B (50% APR, not Rate A) — because owner has let it for less than 7 years or does not meet the Rate A occupation test: Rate B was always 50% and is NOT affected by the £1m cap. The 100% vs 50% distinction within APR itself is preserved. EXAMPLE 4 — FARM WITH HOPE VALUE: A farm with agricultural value of £1m but market value of £1.8m (because of planning potential / development land). APR applies to the agricultural value (£1m) only. The £800,000 hope value excess is NOT covered by APR. It may attract BPR if the farm business qualifies, but development value is often excluded from BPR too (s.105(3) — dealing in land). EXAMPLE 5 — HUSBAND AND WIFE FARM: Each spouse has their own £1m allowance. Careful will drafting and inter-spouse transfers can allow the farm to utilise both spouses' £1m allowances sequentially (up to £2m at 100% combined). This does NOT happen automatically and requires professional will planning before the first death.

The FA 2026 reform significantly increased the IHT exposure of mid-to-large farming estates. Several planning options should be considered, ideally with specialist agricultural solicitors and tax advisers: (1) MAKING OR UPDATING WILLS — THE FIRST PRIORITY: many farming wills were drafted before FA 2026 and relied on the old unlimited 100% APR. Existing wills should be reviewed immediately to: (a) optimise use of both spouses' individual £1m allowances; (b) consider whether agricultural property should pass directly to children on the first death (using the first spouse's £1m allowance) rather than relying on the survivor's estate; (c) ensure farmhouses and cottages are left in a way that preserves their APR character; (d) update succession plans for farming partnerships and companies; (2) LIFETIME GIFTS: if a farmer gives agricultural property outright during their lifetime and survives 7 years, the gift is a potentially exempt transfer (PET) and falls out of the estate completely. This avoids the 40% rate on the excess entirely — but requires the farmer to be prepared to fully transfer ownership. Partial gifts or gifts where the farmer retains enjoyment may be Gift with Reservation (GWR) issues (s.102 FA 1986); (3) SPOUSAL EXEMPTION AND PHASED TRANSFERS: gifts between spouses are IHT-exempt (the spousal exemption). The surviving spouse's own £1m allowance is then available. Careful planning of which assets pass by will vs survivorship can double the effective 100% APR available across a married couple's joint estate; (4) AGRICULTURAL TRUSTS: placing farming assets into a discretionary trust during lifetime crystallises a chargeable lifetime transfer (CLT), but if APR is available on the transfer, the effective IHT cost at that point is reduced. In-trust assets benefit from APR on the 10-year anniversary charges and exit charges if the trust property remains qualifying agricultural property — and the trust's own £1m allowance applies separately; (5) INSTALMENT OPTION: IHT on qualifying APR property above the £1m threshold can be paid in 10 annual instalments (IHTA 1984 s.227) — the first instalment is due at the normal 6-month deadline and interest accrues on land instalments. This does not reduce the IHT charge but preserves farming cash flow by spreading payment over a decade; (6) FARMHOUSE PLANNING: farmhouses often represent a large proportion of a farming estate's value. Ensuring continued occupation 'for the purposes of agriculture' by a qualifying farmer (the owner-occupier or a farm worker) is critical to maintaining 100% Rate A relief on the farmhouse. A farmer who retires to the farmhouse but ceases active farming may lose APR on the house; (7) REVIEWING COMPANY AND PARTNERSHIP STRUCTURES: farm businesses held through companies or partnerships may qualify for BPR as well as APR. The combined £1m allowance means the order of allocation between APR and BPR assets matters for planning; (8) LIFE INSURANCE: taking out a whole-of-life policy written in trust (outside the estate) to provide a lump sum to pay IHT on death is a simple, widely used solution. The policy proceeds are paid to the trustees and are available immediately to pay the IHT bill before probate, without the instalment delay. For large farming estates this may be the most practical short-term solution.

Yes — the reform interacts with the existing Rate A / Rate B distinction within APR in an important way. RATE A (100% BEFORE THE CAP): applies to property that the transferor has occupied for the purposes of agriculture for the 2 years before death, OR property that the transferor has owned for 7 years and which has been occupied by someone else (including a tenant) for the purposes of agriculture throughout that period. Rate A property above £1m is now taxed at 50% relief (effective IHT rate 20%) rather than 100%. RATE B (50% ALREADY): applies to agricultural property that has not met the Rate A tests — principally tenanted farms where the 7-year ownership rule has NOT yet been satisfied, or property let under pre-1 September 1995 tenancies (which are generally Fixed Term Agricultural Tenancies under the Agricultural Holdings Act 1986, attracting only 50% APR because of the discount inherent in the sitting-tenancy value). HMRC practice has been that AHA 1986 tenancy-encumbered property receives 50% APR. Rate B was always 50% and is unchanged by FA 2026. THE PRACTICAL DISTINCTION: for tenanted farms that qualify for Rate A (7 years ownership + tenant occupation for agriculture): they are affected by the £1m cap — the portion of agricultural value above £1m now attracts 50% (was 100%). For tenanted farms that only qualify for Rate B: no change — they were already at 50%. This creates a planning asymmetry: for some tenanted farm estates, the effective IHT increase from FA 2026 is smaller than for owner-occupied farms (because Rate B already existed). For owner-occupied farms that would have qualified for unlimited 100% APR, the reform is particularly significant. PLANNING NOTE — AGRICULTURAL TENANCIES: farmers who grant new tenancies (Farm Business Tenancies under the Agricultural Tenancies Act 1995 or AHA 1986 arrangements) should consider whether doing so affects the Rate A / Rate B classification for APR purposes on their estate.