Understanding the Latest UK Inheritance Tax Changes (2025/26) 

The UK’s inheritance tax (IHT) rules have changed significantly over the past year. Fiscal drag—the practice of freezing thresholds while asset values rise—means more families are being drawn into the IHT net. Recent budget have added new rules for pensions, business assets and even non‑UK residents. We believe it’s essential to understand UK inheritance tax changes and the questions they raise so you can plan confidently.

What is inheritance tax, and why does it matter?

Inheritance tax is a wealth transfer tax applied to estates over a certain threshold. The key points are:

Nil‑rate band (NRB)

The first £325,000 of an individual’s estate is exempt from IHT. This threshold has been frozen since 2009 and will remain fixed until at least April 2031. Anything above this amount is generally taxed at 40%. Unused portions of the NRB can be transferred to a spouse or civil partner at death, effectively doubling the combined allowance to £650,000.

Residence nil‑rate band (RNRB)

An additional allowance worth £175,000 applies when you leave a main residence to a direct descendant. The RNRB is reduced for estates worth over £2 million and can also be transferred to a spouse or civil partner. Together with the NRB, a couple can pass on up to £1 million tax‑free.

Main rate

Assets above the available allowances are taxed at 40%. IHT receipts reached £5.8 billion in the first eight months of the 2025/26 tax year, reflecting steady growth due to frozen thresholds and rising asset values.

Who pays?

The personal representative (executor or administrator) must settle the IHT bill from the estate before distributing assets. Selling assets to pay tax could lead to delays.

Only around 4.6% of deaths resulted in IHT being paid in 2022–23, yet IHT is a growing revenue source. The Office for Budget Responsibility expects annual IHT receipts to rise from £9 billion in 2025/26 to £14.5 billion by 2030/31.

Key Budget Changes and Upcoming Reforms

Recent budgets have introduced important reforms and changes to inheritance tax that will reshape estate planning starting in 2027 and continuing over the next few years.

1. Threshold freezes extended

The main nil‑rate band, the residence nil‑rate band, and the tapered threshold for the RNRB will remain frozen until the end of the 2030/31 tax year. The freeze increases the number of estates subject to IHT as property prices and investments grow.

2. Transferable £1 million allowance for farm and business assets

In the Autumn 2024 Budget, the government capped the 100% relief for agricultural property relief (APR) and business property relief (BPR) at £1 million per individual. This cap applies to qualifying farm or business assets and will now be transferable between spouses or civil partners from 6 April 2026. Couples can therefore pass on up to £2 million of qualifying assets at 100% relief. Any value above the cap is eligible for only 50% relief, leaving an effective 20% IHT charge. Taxes on this excess may be paid in instalments over ten years.

3. Unused pension pots become taxable

Until now, most defined contribution pensions have been outside the estate for IHT purposes. This will change from 6 April 2027:

• Unused pension funds and death benefits will be included in a person’s estate for IHT. Personal representatives—not pension scheme administrators—will be responsible for reporting and paying the tax.
• Death‑in‑service benefits and dependants’ pensions remain exempt.

This reform aims to prevent the primary use of pensions as a tax shelter and to align the treatment of discretionary and non-discretionary pension schemes.

4. Residence‑based rules for non‑UK domiciled individuals

From 6 April 2025, IHT will move from a domicile‑based to a residence‑based test for non‑UK The inclusion of pensions within IHT is a major change. Under current rules, most modern pensions fall outside your estate because trustees have discretion over distribution. However, starting in April 2027, the changes to inheritance tax will include the following:

domiciled individuals. A person will be treated as a long‑term resident (and therefore liable to IHT on worldwide assets) if they have been a UK resident for at least 10 of the previous 20 tax years. The concept of domicile and deemed domicile is abolished, and the new rules apply equally to UK‑born individuals who later emigrate. Transitional arrangements apply for those who leave the UK before the rule change.

How the New Inheritance Tax And Pension Rules Affect Your Estate

• Most unused pension funds and death benefits will be included in your estate. Even if trustees retain discretion, the funds will generally be taxable unless specific exclusions apply.
• Personal representatives (not pension providers) will be responsible for paying the tax.
• Defined contribution pensions are most affected; defined benefit schemes usually provide a spouse’s pension rather than a lump sum.

If you plan to leave your pension untouched as an inheritance, you should reconsider. Beneficiaries may face both income tax and IHT on withdrawals after age 75. Early planning—drawing income sooner, purchasing life insurance, or gifting from other assets—helps reduce the eventual tax bill.

Planning Opportunities and Lesser‑Known Strategies

Proactive planning remains the best way to minimise IHT. In addition to standard techniques like writing a will and using the nil‑rate bands effectively, some lesser‑known options may help:

• Deed of variation – Beneficiaries can, within two years of a death, redirect an inheritance to others or into a trust. This can reduce the estate’s IHT liability while still benefiting the family.
  
• Business Property Relief (BPR) and AIM shares: Investments in qualifying unlisted companies or certain AIM shares can become exempt from IHT after two years. Note that starting in 2026, the IHT savings from AIM shares will be halved, so careful timing and risk assessment are essential.
  
• Gifts out of surplus income: Regular gifts from income are immediately exempt if they do not reduce your standard of living. With pensions entering the estate, drawing pension income to fund gifts can be more tax‑efficient.
  
• Life insurance held in trust: Policies can provide funds to cover IHT and avoid being part of your estate. Premiums may be covered by the surplus income exemption.
  
• Trusts and family investment companies: These structures can allow assets to be moved outside your estate while retaining some control. Trust rules are complex, especially with new caps on APR/BPR for trusts created after October 2024, so professional advice is vital.
  
• Lifetime gifting and utilisation of allowances: Gifting assets more than seven years before death removes them from your estate but may trigger capital gains tax. Under current rules, gifts of farm or business assets made before 6 April 2026 can still receive unlimited relief.

Planning strategies must be tailored to individual circumstances and kept under review as legislation evolves.

Non‑Dom Reforms – What You Should Know

The move to a residence‑based IHT regime is particularly significant for internationally mobile individuals. Key points include:

• Long‑term resident test: Non‑UK assets fall within IHT if you have been UK resident in 10 of the previous 20 tax years. For those aged under 20, the test looks at whether the individual has been a UK resident for at least half of the years since birth.
• No more deemed‑domicile concept: The concept of deemed domicile (15 of 20 years) is replaced; residence is the sole determinant.
• ‘Tail’ period after leaving the UK: A long‑term resident remains liable for IHT on worldwide assets for up to three to ten years after becoming non‑resident, depending on how long they were a resident before. Once someone has been non‑resident for ten consecutive years, their worldwide assets become excluded property again.
• Transitional rules: Individuals who left the UK before 6 April 2025 may remain under the old rules until they return.

In light of these reforms, international clients must review their residency, asset structures, and any existing trust arrangements.

How We Can Help You Deal With Latest UK Inheritance Tax Changes

Apex Accountants understand that inheritance tax can feel complex and personal. We provide comprehensive support to help families, business owners and international mobile individuals manage their IHT exposure. Our services include:

• Estate and IHT planning: We help you structure your estate to make full use of NRB, RNRB and agricultural/business relief, prepare wills, and manage lifetime gifting.
  
• Pension and retirement planning: We review your pension strategy in light of the 2027 reforms and advise on income drawdown and life insurance to mitigate tax.
  
• Agricultural and business succession planning: We advise on using the new £1 million allowance effectively, transferring allowances between spouses, and funding any tax due—helping you pass on farms and businesses without breaking them up.
  
• Trusts and family investment structures: Our team designs and implements trusts or family investment companies, considering new limits on APR/BPR and trust allowances.
  
• Non‑dom and cross‑border advice: We guide internationally mobile clients on the new residence‑based rules, the 10‑year tail, and strategies to manage worldwide assets.
  
• Reporting and compliance: Our team prepares and submits IHT400 forms, maintains communication with HMRC, and guarantees accurate calculation and timely payment of all taxes.
  
• Valuation and funding solutions: We work with specialist valuers and insurers to determine the value of your assets and arrange life cover or financing where needed.

Conclusion

Inheritance tax is increasingly important for UK families, business owners and expatriates. Frozen thresholds, the inclusion of pensions, a transferable cap on farm and business relief, and a shift to residence‑based rules all mean more estates will face IHT over the coming decade. At the same time, allowances and reliefs can still help you protect your wealth if used wisely.

We encourage readers to review their estate plans now, particularly if you intend to rely on pension wealth or own farms or businesses. Taking professional advice early can help ensure your legacy passes to the next generation with minimal tax. The inheritance tax and pension rules are evolving quickly, and our team at Apex Accountants is here to guide you through it.

FAQs

Recent policy announcements have led to a surge in IHT queries. These are some of the most common questions our clients ask, with concise answers drawn from official guidance and industry sources.

1. How much can my family inherit before IHT becomes payable? 

Each individual has a £325,000 nil‑rate band and a £175,000 residence nil‑rate band. Couples can transfer unused allowances to pass on up to £1 million tax‑free.

2. Is my pension included in my estate? 

Currently, pensions are outside your estate if trustees have discretion. From April 2027, most unused pension funds and death benefits will be included.

3. What gifts can I make without triggering IHT? 

You can give away up to £3,000 each tax year without affecting your estate. Small gifts of up to £250 per recipient and wedding gifts of up to £5,000 for children are also exempt. Regular gifts from surplus income are immediately exempt if they do not reduce your standard of living.

4. Can I give my house to my children to avoid IHT? 

Yes, but you must live for seven years after making the gift to remove it from your estate. If you continue to live in the property, it counts as a gift with reservation and remains taxable.

5. Who actually pays the IHT bill? 

The tax is paid by the estate, not the beneficiaries. Executors or administrators are responsible for settling IHT before distributing assets.

6. Are the new £1 million allowances transferable between spouses? 

Yes. Any unused £1 million allowance for farm or business assets can be transferred to a surviving spouse or civil partner, giving a couple up to £2 million of relief.

7. How can farmers pay the 20% tax on assets above the allowance? 

Tax on the excess (where only 50% relief applies) can be paid over ten years without interest. Many farmers also use life insurance or gifting strategies to provide cash for future tax bills.

8. What happens to non‑UK domiciled individuals? 

From April 2025, liability for IHT depends on UK residence. An individual who has been resident for at least 10 of the last 20 years is considered a long‑term resident and is taxed on worldwide assets.