Inheritance Tax is Changing – What It Means for Your Estate Planning
Britain’s inheritance tax (IHT) system is undergoing substantial reform, reshaping the landscape for families planning the transfer of wealth. While inheritance tax may once have felt like a distant concern, rising property values and frozen tax thresholds are drawing more households into its scope. As the UK enters a period of significant intergenerational wealth transfer—an estimated £5.5 trillion over the next few decades—now is a prudent time to revisit your estate plans.
IHT in Numbers: The Growing Burden
Inheritance tax is charged at 40% on the value of estates above the nil-rate band, currently set at £325,000 per individual, with an additional £175,000 residence nil-rate band available when passing on the family home to direct descendants. However, these thresholds have been frozen until at least 2028, and when adjusted for inflation, their value is diminishing. This fiscal drag means that many families who might not consider themselves wealthy—particularly those who own property in high-value areas—are finding their estates subject to IHT.
For context, average house prices in the UK have risen by nearly 5% year-on-year. A modest home in the South East or London can now easily exceed the nil-rate bands, pushing estates into taxable territory. The government’s own projections show IHT receipts hitting record levels, with over 7% of estates expected to face inheritance tax within the next decade.
Pensions and the 2027 Rule Change
From April 2027, the way pensions are treated for IHT purposes is set to change. At present, most defined contribution pension pots can be passed on outside of your estate, avoiding inheritance tax if the pension holder dies before age 75. Even after age 75, beneficiaries only pay income tax on withdrawals, not IHT. This has made pensions an attractive tool for intergenerational wealth transfer.
However, from 2027, undrawn defined contribution pensions will be included in the taxable estate. The government argues this brings pensions more in line with their intended purpose—providing retirement income rather than a tax shelter. Estimates suggest this will bring thousands of estates into the IHT net for the first time. For clients approaching or in retirement, it may be worth considering whether it still makes sense to preserve pension assets or to draw them earlier and use other assets for succession planning.
Business Relief: Capped from 2026
For business owners and landholders, another important change is coming in April 2026. Currently, Business Property Relief (BPR) and Agricultural Property Relief (APR) can exempt qualifying assets from IHT entirely. These reliefs have traditionally allowed family businesses and farms to be passed on intact, without needing to sell off parts to pay tax.
Starting in 2026, a new cap will limit the amount of BPR and APR available. The combined maximum relief will be set at £1 million, and any value above this threshold will only receive 50% relief. While this may still offer substantial savings, it significantly reduces the scope of protection for larger estates. Business owners should consider succession planning now—possibly transferring ownership before the cap takes effect or exploring alternative structures.
Property and Thresholds: A Silent Creep
Alongside policy changes, the continued growth in UK property prices combined with frozen tax bands means more estates are crossing the IHT threshold each year. The £325,000 and £175,000 allowances have not increased since their introduction, and inflation has steadily eroded their real value. If these allowances had tracked inflation, the combined £1 million tax-free threshold for couples would be significantly higher today.
As property prices climb, even modest estates are at risk of incurring IHT. Homeowners should be particularly mindful of how their property is passed on - whether to a surviving spouse, children, or via a trust. Structures like life interest trusts can ensure the surviving partner has use of a home or assets while preserving the estate for children, often in a more tax-efficient way.
Modern Families and Planning Complexity
Family dynamics are more complex than in the past. Blended families, second marriages, cohabiting partners, and estranged children can all complicate the question of who inherits what. Without careful planning, assets may not be distributed in the way you intend - and valuable tax reliefs might be lost.
Life interest trusts are one way to manage these complexities. For example, they can allow a surviving spouse to benefit from assets during their lifetime while ensuring that those assets eventually pass to the intended children. Stepchildren and adopted children are eligible for the residence nil-rate band, but proper structuring is still crucial to secure reliefs and avoid unintended tax consequences.
International Assets and the New Residency Test
From April 2025, the UK will move from a domicile-based to a residency-based system for IHT. Under the new rules, individuals who have been UK residents for at least 10 of the past 20 years will be liable for IHT on their worldwide assets. Those who leave the UK will continue to be within the scope of UK IHT for a period of up to 10 years, depending on how long they were resident.
For many clients, particularly those who are globally mobile or who expect to inherit assets from overseas, this represents an important shift. While the new system simplifies some aspects of tax exposure, it also means that long-term residents cannot rely on a foreign domicile to shield assets from IHT. Careful planning may be needed to coordinate estate strategies across borders, particularly where foreign inheritance laws or taxes differ.
What You Can Do Now
The inheritance tax landscape is changing. But these changes don’t have to be negative—with appropriate planning, many families can still pass on wealth in a tax-efficient manner. Some steps to consider include:
Reviewing and updating your will
Ensuring pension nominations are current
Exploring lifetime gifting to use exemptions
Using trusts to manage complex family needs
Considering insurance policies to cover potential liabilities
Reviewing business structures in light of BPR/APR changes
Importantly, estate planning isn’t a one-off task. It should evolve with your circumstances—whether that’s a new grandchild, a second property, or a move overseas. With major changes taking effect from 2025 through 2027, now is the time to assess your plans and adjust where necessary. A well-structured estate plan can offer peace of mind today and lasting value for the next generation.
The silver lining here is that nothing is inevitable – with proactive planning, you have the tools to dramatically reduce, or even eliminate, the inheritance tax your estate might pay. But the key is to start early and review often.
Sources: HMRC, House of Commons Library, and the Office for Budget Responsibility.
Disclaimer: The Financial Conduct Authority does not regulate Inheritance Tax Planning, Estate Planning & Trust Planning. The value of tax benefits described depend on your individual circumstances. Tax rules can change.