Consultation on Agricultural and Business Property Relief: payment of tax by instalments

Sarah Carlyon and Tom Bradfield

This post is the next in our series on the impact of changes to agricultural property relief (APR) and business property relief (BPR) from inheritance tax (IHT) following the recently closed consultation on these reliefs. An in-depth look at the consultation and what it says can be found here. 

This article focuses on the payment of IHT by instalments, the proposed changes, and who will be able to take advantage of the proposed changes. 

IHT can be charged on many occasions with the main events including the making of gifts, on death, and during the lifetime of a trust. 

From 6 April 2026, the ability to take advantage of APR and BPR applying at 100% on such occasions will be capped at £1m per person. With this limitation in place, the number of people paying IHT will rise, making the use of instalments more appealing, particularly to those who until now were not in the IHT net. 

Having the ability to pay by instalments can help prevent a forced sale of a farm or business by allowing time to raise cash from elsewhere. Where a sale is intended, the ten year instalment period can give the owners time to get the best price. Payment by instalments is therefore an important and valuable part of the IHT system.

Current position

Instalments

At the moment, the option to pay tax in instalments applies only to the tax on specific categories of property. Broadly speaking, these are land, shares in companies and interests in other types of businesses (for example partnerships). 

The rules are technical and contain some strange and complicated exceptions relating to unlisted company shares in particular. These can be difficult to apply and the reasons behind the exceptions are unclear. In some cases of a minority holding in a private company, the taxpayer has to prove they would suffer “undue hardship” if they had to pay the tax in one lump sum.

Interest

Adding to the current complexity, there is a separate but overlapping set of rules governing interest on IHT. In most cases, interest is payable separately on each instalment from the date it becomes due. In effect that makes instalments of IHT interest-free, provided they are paid on time.

Without these rules, interest would be due on the full amount of tax from six months after the end of the month of death to the date of payment. Interest on IHT is currently payable at a rate of 8.25%, so paying IHT by instalments would not be nearly so attractive an option.

But again there are odd quirks in the rules. 

Example A:

Imagine a builder who owns his yard personally but runs his business through a limited company. Non-agricultural land used but not owned by a business would get BPR (at 50%) and would qualify for the IHT instalment option. However, interest would be payable on the full amount of tax due on the land from six months after the death. 

Proposed changes 

The consultation states that interest-free instalments will in future be available in all cases in which APR or BPR apply. We assume that they will be “interest-free” in the sense set out above, i.e. interest will still run on each instalment which is paid late.

This change will not significantly expand the types of assets on which the tax can be paid in “interest-free” instalments. (Although the builder in the example above would benefit.) However, they will make it far more straightforward to determine when they are available. In that sense this is a simplification only. 

That said, if the rules had not been changed we expect there would be significant numbers of taxpayers who would have faced uncertainty over whether they qualified for interest-free instalments after 5 April 2026. 

We expect the change will be welcomed by the significant number of taxpayers suddenly faced with inheritance tax charges on family farms and businesses.

Where the instalment option is not available 

The interest-free instalment option ceases to be available where the APR or BPR property is sold during the instalment period. In this situation the IHT will be immediately payable and interest charged from the day after the sale. 

Why might interest-free instalments be important to me? 

To make the maths clearer, all of these examples assume that the IHT nil rate band of up to £325,000 has been used up already.

Example B:

You die after 6 April 2026 owning all of the shares in a private trading company worth £5m. Under the new rules £1m will qualify for BPR at a rate of 100%, meaning 0% IHT will be payable on £1m worth of the shares. The remaining £4m of share value will qualify for only 50% relief. The result is that when you die £2m of value will be subject to IHT at a rate of 40%, giving your estate a liability of £800,000. 

Choosing to pay using the instalment option enables your estate to pay the £800,000 over 10 equal interest-free instalments. It might be easier for your family to find £80,000 per year than £800,000 up front, potentially avoiding a need for them to sell the business.

Example C: 

You make a gift of let farmland to a trust after 6 April 2026. Hold-over relief applies so no capital gains tax is charged. The land has a market value of £400,000 which is equal to its agricultural value. This is a chargeable lifetime transfer incurring an immediate 20% IHT charge. Because of the type of tenancy, the farmland qualifies for APR at a maximum rate of 50% and the £1m allowance is not used. The result is the 20% tax charge is charged on £200,000, resulting in a liability of £40,000. Viewed another way, the 20% tax charge is halved to 10% and charged on the £400,000.  

The £40,000 IHT liability can be paid by way of 10 annual interest-free £4,000 payments. You may be more likely to be able to afford these payments out of your remaining income, allowing you to use the trust to provide for your family while reducing the IHT which would be payable when you die.

Example D:

Some trusts are subject to IHT charges every 10 years as more fully explained in our article here.

In short, from 6 April 2026 trusts will have their own allowance of up to £1m which will refresh every 10 years. This allowance will determine the availability of APR and BPR for exit charges as well as these anniversary charges. 

You are a trustee of a trust settled on 1 January 2017 which holds £2m of shares in a private company worth £25m. The shares qualify for BPR at 100%. At the next 10-year anniversary charge falling on 1 January 2037, IHT will be payable, due to the cap on relief. The instalment option will be available automatically with no need to argue hardship.

If the trustees wish to keep the shares, using the instalment option will mean the tax can be paid over 10 years interest-free. The annual instalments are more likely to be payable out of dividends paid by the business.

What can you do

From 6 April 2026 there will be more people who will be required to report and pay IHT on assets that would previously have been fully relieved. Fortunately, it appears that the rules on payment of tax by interest-free instalments will be simplified so that it is easier to determine whether you will qualify. However, you should carefully consider what tax is likely to arise and how your estate can afford to pay it.

Burges Salmon can advise on these and wider estate planning issues, both pre and post 6 April 2026. 

More information 

We are currently part-way through a series of articles considering what the changes might mean for landowners and business owners:

1. Introduction and deep-dive on the detail - Consultation on agricultural and business property relief 
2. Landowners and family businesses - impact of proposed IHT changes on lifetime gifts
3. Landowners and family businesses - impact of proposed IHT changes to estates on death  
4. Landowners and family businesses – impact of proposed IHT changes to trustees
5. Consultation on Agricultural and Business Property Relief: Changes to Related Property Rules and Valuation Issues

Do read through the above articles as well as look out for upcoming post that will cover the impact on entrepreneurs. 

See also our recent article on the cost of payment by instalments which are not interest-free https://www.burges-salmon.com/articles/102ilvf/hmrc-interest-rates-the-cost-of-paying-iht-by-instalments

We expect the change will be welcomed by the significant number of taxpayers suddenly faced with inheritance tax charges on family farms and businesses.