The UK Labour government's recent budget has introduced significant reforms to inheritance tax (IHT), reshaping how individuals and families may need to manage their estates.

Summary of changes

Among the most notable changes is the introduction of personal caps on Business Property Relief (BPR) and Agricultural Property Relief (APR) at £1 million of qualifying assets from April 2026. Relief on assets exceeding these thresholds will reduce IHT by only 50% (i.e., applying a rate of 20% versus the headline 40% rate), curtailing the full exemptions many estates previously relied upon to transfer qualifying assets.

Additionally, certain pension assets will fall under the IHT regime from April 2027, and a shift from domicile-based to residence-based taxation in April 2025 means some long-term UK residents may face IHT on their worldwide assets for the first time, whilst AIM shares will be assessed for IHT at a reduced rate of 20% from April 2026.

These changes carry profound implications:

• Farmers and business owners: The capping of 100% relief under APR and BPR could impose significant tax liabilities on family farms and businesses with high asset values but limited liquidity. They must reassess ownership and succession planning to minimise tax exposure.
• High-net-worth individuals/investors: The inclusion of pensions, AIM shares and foreign assets under IHT demands a comprehensive reevaluation of estate planning strategies.

Strategies to mitigate IHT include gifting assets early to benefit from the 'seven-year' exemption and reviewing pension arrangements to minimise the impact of the new regulations.

Some are turning to life insurance policies, such as whole-of-life cover or gift inter vivos plans, to ensure tax liabilities can be met without liquidating key assets. Due to the shift to a residence-based system, non-domiciled individuals are considering relocating to jurisdictions with more favourable tax regimes.

Valuation now sits at the heart of these tax planning decisions. A robust valuation is essential to quantify potential IHT liability and determine the effectiveness of various reliefs and exemptions. Under the new BPR and APR caps, valuing qualifying assets is critical to optimising the £1 million threshold and making informed decisions around any IHT structuring.

Understanding the basis of valuation for IHT

IHT valuations hinge on the "loss to donor " principle, measuring the reduction in the donor's estate resulting from a transfer of assets.

This approach ensures that the taxable value of a gift or transfer reflects its economic impact on the estate rather than solely its market value in the hands of the recipient. For instance, when gifting shares in a private company, the loss to the donor might differ from the market value of the shares transferred, especially if the transfer reduces the donor’s degree of control or diminishes the estate's overall value.

This differs from the statutory basis of valuation set out in sections 272 and 273 of the Taxation of Chargeable Gains Act 1992 (i.e., that used for most other tax purposes in the UK), which focuses on the open market value of the specific shareholding. Under this framework, the valuation is based on the price the shareholding might reasonably be expected to fetch in a sale between a hypothetical willing vendor and purchaser. Unlike the loss-to-donor approach, this methodology values the shareholding in isolation without referencing its impact on the donor’s overall estate.

Related party rules

One intricate area of IHT valuation is the application of the related party rules, codified in section 161 of the Inheritance Tax Act 1984. These rules seek to prevent undervaluation by aggregating property owned by related parties, ensuring the valuation reflects the enhanced economic value when held collectively.

Whilst the position can be complicated where trusts are involved, especially when control needs to be examined, these rules apply primarily to spouses or civil partners and do not extend to other familial relationships, such as children or siblings.

For spouses and civil partners, property held by one is automatically aggregated with property held by the other for IHT valuation purposes. The concept of 'marriage value' is to be considered in such valuations to account for the added economic worth when distinct interests are consolidated, creating a synergy that elevates overall value beyond each part’s standalone value.

This aggregation could diminish minority discounts that might otherwise apply where aggregation is not in point, ensuring the estate is valued as if the property were held as a single aggregated unit.

For non-spousal family members, the related party rules do not apply. The legislation does not mandate aggregation of holdings for these relationships, regardless of shared family ties. Each holding is assessed independently unless there is evidence of collective control or a clear contractual link between the holdings.

The road ahead for estate planning

In this evolving landscape, valuation is no longer merely a compliance exercise but a strategic tool used to assess available reliefs, plan lifetime asset transfers, and ensure compliance with HMRC requirements.

Insurers and executors will each have a vested interest in seeking evidence of valuation to limit their exposure, and we envisage more pressure being applied to owners of assets to seek formal valuation advice.

As families navigate the complexities of the new IHT framework, robust valuations provide the foundation for preserving wealth and securing financial legacies in an increasingly challenging tax environment.

Need to understand the value of your assets to optimise tax reliefs? Let our valuation experts help protect you.

Touchstone Advisory is an independent valuations advisory firm comprising a diverse team of skilled professionals with extensive experience from leading ‘Big Four’ accounting firms’ valuations teams.

Within our broad range of valuation credentials, we specialise in IHT valuations, bringing a wealth of expertise across all sectors. Our track record includes successful engagements in agriculture, family businesses, high-net-worth estates, technology, healthcare, manufacturing, energy, and financial services.