Business & Agricultural Relief: How HMRC Investigates Claims After the 2026 Reform

Since 6 April 2026, 100% relief from inheritance tax on business and agricultural property has been capped for the first time. For estates below the new threshold, little has changed. For family businesses and farms above it, every disputed pound of trading status or valuation now carries a direct tax cost, and HMRC's enquiries into Business Relief and Agricultural Relief claims are rising accordingly.

What actually changed on 6 April 2026

Business Relief (BR, more formally Business Property Relief) and Agricultural Relief (APR) have historically given 100% relief from inheritance tax on qualifying business and farming assets, with no upper limit. That changed for deaths on or after 6 April 2026, and for lifetime gifts made on or after 30 October 2024 where the donor dies on or after 6 April 2026.

The 100% rate is now restricted to a combined £2.5 million of value transferred across BR and APR together. Value above that threshold receives relief at 50% instead, producing an effective inheritance tax rate of 20% on the excess rather than the standard 40%. The £2.5 million figure itself has a telling history: it was originally announced as a £1 million threshold at Autumn Budget 2024, before the government unexpectedly increased it to £2.5 million on 23 December 2025, shortly before the reform took effect. Any part of the £2.5 million allowance not used on an individual's death is transferable to a surviving spouse or civil partner, including where the first death occurred before 6 April 2026, and the combined allowance is fixed at £2.5 million until 5 April 2031.

The practical effect for a family business or working farm is that structuring, valuation and trading status, questions that were once largely academic once 100% relief was secured, now determine a very real tax bill on everything above the threshold.

Why this is turning into an HMRC investigation area

HMRC has always been entitled to challenge a Business Relief or Agricultural Relief claim. What has changed is the incentive on both sides. Below the cap, a marginal dispute about whether part of a business was “wholly or mainly” trading, or whether a cash balance was genuinely needed for the business, often wasn't worth contesting: 100% relief was available either way, or the numbers were too small to justify a fight. Above the £2.5 million threshold, that marginal question now has a direct 40% or 20% cash consequence on every pound at stake. That is precisely the kind of uses that draws HMRC's compliance resource, and precisely the kind of estate where a valuation, a trading classification or an excepted-asset argument is now worth defending properly.

HMRC's main line of attack: the “wholly or mainly trading” test

Relief is not available where a business consists wholly or mainly of dealing in securities, land or investments, or of making or holding investments. Establishing which side of that line a business falls on is where most disputes are fought, and the case law is genuinely mixed, which is exactly why HMRC continues to litigate it.

The starting point is HMRC v Personal Representatives of Pawson deceased [2013] STC 976. The First-tier Tribunal originally allowed relief on a furnished holiday letting cottage, but the Upper Tribunal reversed that decision, holding that letting property is generally an investment activity and that the services provided, cleaning, a gardener, heating and hot water, fell well short of what would be needed to displace that starting point. Executors of Marjorie Ross v HMRC [2017] UKFTT 507 (TC) reached the same conclusion on similar facts: cleaning, bar meals and a caretaker were not enough.

But Pawson is not the end of the story. In HMRC v Personal Representative of the Estate of M W Vigne deceased [2018] UKUT 357 (TCC), the Upper Tribunal upheld a finding that a livery business qualified for relief, because the level of active service, worming, feeding, manure removal, daily health checks, meant the business was plainly being run from the land rather than simply deriving income from owning it. The Personal Representatives of Grace Joyce Graham (deceased) v HMRC [2018] UKFTT 306 (TC) went the same way on an exceptionally well-serviced holiday letting business that the tribunal described as closer to “a family-run hotel than a second home let out in the holidays”. On agricultural land specifically, land let out on a bare grazing licence with no additional services has been held not to amount to a business at all (McCall v HMRC [2009] STC 990), while a landed estate's mixed trading and investment activities were treated as a single composite business in Brander v HMRC [2010] All ER (D) 94 (Aug), the well-known Balfour case, on the basis that the letting activity was ancillary to the estate's predominantly trading character.

Excepted assets: HMRC's other favourite target

Even where a business plainly qualifies as trading, relief only extends to assets that were used wholly or mainly for the business throughout the two years before the transfer, or that are genuinely required for the business's future purposes. Assets that fail both tests are “excepted assets” and are carved out of the claim, even though the wider business qualifies.

Cash balances are the classic battleground. In Barclays Bank Trust Company v IRC [1998] STC (SCD) 125, £300,000 of a company's £450,000 cash balance was held to be an excepted asset because it exceeded what the company's trading needs demonstrably required, and there was no specific, evidenced plan for using it. HMRC's practical approach on enquiry is to ask for exactly that evidence, board minutes, correspondence, a business case, showing a concrete intended use for surplus cash or investments held within an otherwise trading company. Where none exists, the excepted-asset argument is difficult to resist. Personal-use assets held within a business are treated similarly, though the correct approach looks at the asset as a whole: in Marquess of Hertford v IRC [2005] STC (SCD) 177, a suite of rooms in a stately home opened to the public commercially was not treated as an excepted asset simply because the wider building also had a private, personal-use element.

The two-year ownership rule and clawback on death

Property must generally have been owned throughout the two years immediately before the transfer to qualify as relevant business property, subject to specific relaxations where replacement property is involved or where ownership periods can be aggregated on death. Lifetime gifts carry a further risk: where a gift was a potentially exempt transfer, relief on the donor's death within seven years depends on the original property still being owned by the recipient and still being relevant business property immediately before the transferor's death. A gift that qualified for relief when made can lose that relief entirely if the recipient sells the business and does not fully reinvest the proceeds into another qualifying business within the rules, an issue that becomes far more expensive to get wrong now that the 100% rate has a ceiling.

How these cases typically unfold

Case A: The furnished letting business that fell at the first hurdle

An estate claims 100% Business Relief on a portfolio of four furnished holiday cottages worth £3.1m, run by the deceased with the help of a part-time cleaner and an online booking platform. HMRC opens an enquiry, citing Pawson directly, and points out that the services provided (cleaning between lets, basic maintenance) fall well short of the level in Vigne or Graham. Working through the evidence honestly, the executors accept the business is, in substance, a property letting investment. With the £2.5m allowance already used elsewhere in the estate, the reclassification produces an inheritance tax liability of roughly £1.24m at 40% on the full value, since none of the letting business qualifies for either the 100% or the 50% rate as an investment activity. Early, realistic advice on this point, before a return was submitted claiming full relief, would have avoided a contested enquiry and the associated professional costs, though it would not have changed the underlying tax position.

Case B: The trading company with too much cash

A company with a genuinely trading manufacturing business also holds £2m in a deposit account, built up over several years and not connected to any specific project. On the owner's death, the estate claims 100% relief on the full value of the shares. HMRC challenges the cash balance as an excepted asset, citing Barclays Bank Trust Company v IRC, and asks for evidence of a specific business purpose for the funds. None exists beyond general statements about “future expansion”. The company's accountants had, in fact, discussed a specific acquisition eighteen months before the death, but no contemporaneous board minute recorded it. Locating a subsequent email trail and a draft heads of terms document from that period is sufficient to satisfy the tribunal that the funds were earmarked for a genuine business purpose, and the excepted-asset challenge is defeated, illustrating how much this issue turns on paperwork that should be created at the time, not reconstructed under enquiry.

Responding to a Business Relief or Agricultural Relief enquiry

HMRC typically opens these enquiries by requesting the underlying accounts, a breakdown of the business's assets and activities, and an explanation of how any letting, investment or cash-holding element of the business fits with its trading character. The response that succeeds is built well before the enquiry letter arrives: clear board minutes recording the business purpose of significant cash or investment holdings, contemporaneous records of the level of service provided in any letting activity, and a valuation prepared by someone who understands how the tribunals actually apply the trading test, not simply an accounts-based figure. Where HMRC's position is wrong on the facts, the case law above gives real, specific ammunition. Where it is right, the priority shifts to minimising the consequence, correct valuation of the excepted or non-qualifying element, and, where a penalty is proposed, challenging the behaviour categorisation on which it is based.

Related guides in this series

• Discovery assessments: the complete guide
• Director liability: the full picture
• Offshore assets investigation: full guide
• Estimate your penalty
• Trust Registration Service: penalties for non-registration