The £2.5 million cap on business and agricultural property relief

A worked example

Illustration using a made-up company. A joinery and shopfitting business has been trading for eighteen years, has no let property on the balance sheet and holds a working capital balance the firm has already agreed is needed by the business. The most recent valuation, prepared for a bank facility review, puts the qualifying business property at £4 million.

Qualifying business property on death

Made-up figures

Value of qualifying business property£4,000,000

Relief at 100% on the first £2.5 million£2,500,000

Remaining value, relief at 50%£1,500,000

Taxable at 40%, an effective 20% on the excess£300,000

A finance report with charts being reviewed beside a laptop

Paid over ten equal annual instalments, interest-free, that is £30,000 a year against the business. The estate avoids a single bill at a point when it may also be dealing with probate and a change of ownership. Below £2.5 million of qualifying property, under current rules, none of this tax arises at all. The same business valued at £2.2 million in the accounts and a formal valuation would owe nothing under business property relief, whatever else is in the wider estate.

What is still outside the cap

What counts toward it

Shares in an unquoted trading company, a sole trader or partnership business, and agricultural land and buildings that already qualified for agricultural property relief before this change. HMRC's Shares and Assets Valuation Manual (SVM111210) is the starting point for valuing the shares or the business.

What never counted

Section 112 of the Inheritance Tax Act 1984 still excludes any asset not used wholly or mainly in the business over the previous two years and not required for its future use. Surplus cash, a let investment property or a loan to a connected company sits outside business property relief whether the estate is above or below £2.5 million, set out in surplus cash held in a client's company.

What runs alongside it

The ordinary nil-rate band of £325,000 and residence nil-rate band of £175,000 apply to the rest of the estate as before. From 6 April 2027, most unused pension funds also count in the estate under Finance Act 2026, covered in when the pension joins the estate.

Where this shows up first

A firm sees the number before any adviser does. A balance sheet growing year on year, a formal valuation commissioned for a bank, a shareholder exit or a divorce, a set of farm accounts with land carried at historic cost against a current market value many times higher: each of those is already in a file an accountant holds. Whether the figure in that file sits above or below £2.5 million is arithmetic on information the firm already holds.

£2.5m

gets full relief per estate from 6 April 2026

20%

effective inheritance tax rate on qualifying property above that line

£5m

combined allowance available to a couple if none of it was used on the first death

Finance Act 2026; announcement 23 December 2025.

What is accountancy work and what is advice

Accountancy work

Preparing or holding the valuation, checking what qualifies under the two-year ownership test, and showing a client where their qualifying business or agricultural property sits against the £2.5 million line.

Regulated advice

Deciding what to do about the amount above the line: lifetime gifting, a trust, insurance to cover the tax, or restructuring how the shares or land are held. That is for the Equity & General financial adviser.

An accountancy practice without FCA permissions cannot give that advice. In an Altro partnership, the introduction is made through the portal in the firm's name, the client meets the Equity & General Account Manager first, and the financial adviser gives the advice. Your firm sees every introduction tracked from the first call to advice implemented. The division of work is set out in what the accountant does and what the financial adviser does, and the steps in how an introduction runs.

The FCA's Financial Lives 2024 survey found that 8.6% of UK adults had taken regulated financial advice in the previous twelve months, and 13% of the self-employed. A business owner whose company has grown past £2.5 million in qualifying value is seen by their accountant every year at the accounts meeting.

Two things to do this week

Pull the last formal valuation. For clients with an unquoted trading company or farmland, check whether a valuation exists from a sale process, a bank facility or a shareholder dispute, and how old it is. A valuation more than two or three years old understates growth in most trading businesses.
Compare the figure with £2.5 million. Where qualifying business or agricultural property is at or above that line, note it in the file alongside the working capital and excepted assets position already recorded, and ask whether the client would like a conversation about it.

Common questions

What counts toward the £2.5 million allowance?

Shares in an unquoted trading company, a sole trader or partnership business, and agricultural land and buildings that qualify for agricultural property relief, valued together at the date of death or transfer. HMRC's Shares and Assets Valuation Manual (SVM111210) treats cash, investments and let property separately, because Section 112 of the Inheritance Tax Act 1984 excludes any asset not used wholly or mainly in the business over the previous two years. A company holding surplus cash or an investment property alongside its trade has that part tested on its own terms, set out in our piece on surplus cash held in a client's company.

Can we tell a client their company is now worth more than the allowance?

Stating a value is accountancy and valuation work your firm already does: the balance sheet, the fixed asset register, a formal valuation prepared for a sale or a shareholder dispute. Saying that a figure of, say, £4 million in qualifying business property sits £1.5 million above the allowance, and that the excess currently has no inheritance tax relief recorded against it, is professional judgement about what is in the file. Deciding what to do about it, whether that is lifetime gifting, a trust, insurance to cover the tax, or restructuring the shareholding, is regulated advice, and sits with the Equity & General financial adviser.

What happens to the allowance if one spouse or civil partner dies first?

Any part of the £2.5 million allowance not used on the first death transfers to the surviving spouse or civil partner, in the same way the nil-rate band already does. Finance Act 2026 carries the unused proportion forward, so a couple who have not used any of it between them can in principle shelter £5 million of combined qualifying business and agricultural property on the second death, before the 50% relief and 20% effective rate apply to anything above that. The transfer has to be claimed on the second death, using the proportion unused on the first.

Does the £1 million business asset disposal relief limit still apply as well?

Yes, and it is a separate limit for a separate tax. Business asset disposal relief reduces the capital gains tax due on a sale during the owner's lifetime, charged at 18% on qualifying gains from 6 April 2026 up to a lifetime limit of £1 million (gov.uk, Business Asset Disposal Relief). The £2.5 million figure is an inheritance tax allowance that applies on death or on a lifetime transfer into certain trusts. A business owner selling up and one who dies holding the shares are tested against two different reliefs, with two different limits and two different tests.