Autumn Budget 2025: Inheritance Tax “Look‑Through” Extended to UK Agricultural Property
Background
Typically, all assets which are physically located in the UK will be subject to UK inheritance tax. Historically, however, it was possible to take the value of UK situs assets outside the scope of UK Inheritance Tax (IHT) if those assets were (a) held in a non-UK registered company/structure and (b) the owner of the company was not “domiciled” in the UK or was the trustee of an excluded property trust. The offshore entity acted as a “situs‑blocker”: shares in a non‑UK company were non‑UK situs assets and therefore excluded property, even if the company’s underlying assets were in the UK.
The end of the “situs blocker”
This position changed fundamentally in April 2017, when the Government introduced Schedule A1 to the Inheritance Tax Act 1984. Schedule A1 removed excluded property treatment from certain assets deriving their value (directly or indirectly) from UK residential property. The legislation has broad scope, so that shares in close companies, loans used to fund the purchase, maintenance or enhancement of a UK residential property, and collateral for such loans, are caught by Schedule A1. As a result, assets deriving their value from UK residential property became subject to UK IHT regardless of the ownership structure. The legislation does not strictly “look through” the ownership structure, but in effect this is the outcome.
The 2017 reforms led to widespread “de‑enveloping” of UK residential property from non-UK companies or structures, driven not only by IHT exposure but also by the ongoing cost and complexity of Annual Tax on Enveloped Dwellings and related compliance.
The extension of Schedule A1
In her Autumn Budget on 26 November 2025, the Chancellor, Rachel Reeves, announced that the Schedule A1 rules will be extended to include UK agricultural property. From 6 April 2026, UK agricultural property held through offshore structures will be subject to the same rules under Schedule A1 as now apply to UK residential property. This will have wide‑ranging implications for international individuals, excluded property trusts, and trustees with indirect interests in UK agricultural assets.
The effect of the extension of Schedule A1 to agricultural property is that non‑UK entities (including offshore companies and partnerships) will become subject to IHT to the extent that their value derives from UK agricultural property. This brings indirect holdings of agricultural land into the UK IHT net even where the owner is:
- not a long‑term UK resident for IHT purposes; or
- an excluded property trust.
The Government has described this change as closing a “loophole” to ensure equal treatment between overseas owners and long‑term UK residents. However, it is notable that Schedule A1 does not, as yet, apply to UK commercial property or to other UK assets (such as cash in UK bank accounts, artwork located in the UK). Accordingly, non-UK structures holding or deriving their value from commercial property will remain excluded property when held indirectly, leaving an apparent inconsistency in the regime. Non-UK entities which hold a mixture of UK residential, agricultural and commercial property will therefore be exposed to UK IHT only in relation to the value deriving from the residential and agricultural land.
Agricultural Property Relief still available – but with limits
Following the extension of Schedule A1 trustees and individuals holding land via offshore structures will now need to consider the application of Agricultural Property Relief (APR) to the assets held. Where the conditions are met, APR will be available to reduce the impact of IHT on the structure. However, several important nuances apply.
Scope of property caught vs property qualifying for APR
Schedule A1 uses a broad concept of “agricultural property” (i.e. this legislation brings more property into the scope of IHT than is relieved under the APR rules). Farmhouses and cottages etc will be included in Schedule A1 whether they would be relieved under APR, but since these buildings are likely to have been caught by Schedule A1 since 2017 (because of their residential character) this extension may not be a significant change.
It is potentially of greater significance that the full market value of agricultural assets falls within the scope of IHT under Schedule A1, while only part of that value may qualify for APR. Any hope, development or other non‑agricultural value will be fully exposed to IHT under Schedule A1 and cannot be relieved under the APR rules.
APR and company ownership
Because Schedule A1 is not a true “look through” individuals and trustees will need to consider how APR will apply to the asset that they actually own ie company shareholdings. APR can apply to the shares in a company which holds agricultural property, but only if specific conditions are met. For example, the owner of the company must have control of the company (broadly, more than 50% of voting rights) and it must have owned or occupied the property for a set period of time. These conditions may be harder to demonstrate or to meet where the agricultural property is not held directly by the company, but is instead held via one or more subsidiary companies. HMRC will generally allow the relief even where there are multiple intervening subsidiaries.
APR rates and the new £2.5 million allowance
When APR applies, it does not necessarily wholly exempt the asset or value from IHT. The relief can either be 100%, or 50% depending on the use of the land, and from 6 April 2026 APR is capped so that a maximum value of £2.5m per person (or qualifying trust) can be 100% exempted from IHT under the APR rules. The excess value above £2.5m can only benefit from 50% APR.
Planning for APR
Individuals or trustees holding agricultural property through non-UK companies may now need to take advice on the application of APR to their structures. For example, it may be possible to change the use of the land to move certain assets into the scope of 100% relief, and it may be helpful to have valuations to show what hope or development value might now be fully exposed to IHT.
Individuals may also want to review their wills and estate planning to consider any gifts they can make or whether spouse relief is being utilised to maximum effect. The £2.5m cap on APR noted above is transferable between spouses so that a married couple can, in theory, pass on up to £5m in APR assets free from IHT.
Trustees of excluded property trusts will also need to review their assets and plan for the new exposure to IHT. Some of these trusts may have their own £2.5m allowance for APR purposes, if they held assets which would have qualified for the 100% relief on 29 October 2024.
Funding the tax
Funding IHT on agricultural property assets has been a large point of concern for most farmers since the amendments to the APR and BPR rules were announced in 2024. This is largely because the IHT is calculated by reference to the capital value of the land, but the income yield from the land would not be nearly sufficient to pay the IHT due.
Individuals and trustees who are now exposed to IHT as a result of the expansion of Schedule A1 will need to consider how the tax is to be funded, and what other tax consequences may arise as a result. For example, if a sale of land is required to pay the tax there may be capital gains tax arising, and there may be further complications where the funds to pay the tax need to be extracted from underlying companies.
Conclusion
Individuals and trustees who may now be subject to IHT under Schedule A1 should:
- identify any UK agricultural property which may be within scope and review its eligibility for APR and the applicable rate;
- quantify potential IHT exposure from April 2026 and consider how this tax may be funded;
- consider any succession planning, and longer‑term restructuring options which may help to mitigate the impact of the IHT on the structure, for example by the use of spouse relief or the instalment option to spread out the impact of the tax.
The extension of Schedule A1 to UK agricultural property marks another decisive step in the erosion of historic IHT protections for offshore structures or the formerly “non-domiciled” individuals.
For international families and trustees with UK agricultural assets, early review and careful planning are essential to manage exposure and avoid unexpected inheritance tax liabilities from April 2026. Please speak to Catherine Pugsley or Anna Gaston or Laura Southern at Lee Bolton Monier-Williams LLP for more information.