Inheritance tax is changing: Are you ready?

The UK government is introducing significant IHT changes, particularly in relation to pensions and death benefits, while the changes to APR and BR came into effect at the start of the tax year. These reforms could reduce the amount of wealth you’re able to pass on to your loved ones and may impact how family businesses and farms are transferred to future generations. By limiting available tax reliefs, these changes could lead to higher IHT bills for many estates across the UK.

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Here’s a clear breakdown of what’s changing and how it might affect you.

Changes to IHT on pensions and death benefits

The current rules

• Most unused pension pots and death benefits are not currently considered part of a deceased person’s estate for IHT purposes. This means families can often inherit unused pension funds without paying IHT.
• Many pensions include a feature called ‘death benefits’, which allows the remaining money in your pension pot to be passed on when you die. These benefits are usually free from IHT and don’t count towards the value of your estate.
• Death benefits are typically tax-free if the deceased was under 75. If they were 75 or over, the recipient may need to pay income tax on the benefits, but no IHT.

New rules (from April 2027)

From 6 April 2027, the UK government will tighten how IHT is applied to unused pension savings and death benefits. The aim is to ensure that pensions are used primarily for retirement income rather than inheritance planning.

Key highlights include:

• Unused pension pots and death benefits under UK registered pension schemes, (including both defined contribution and defined benefits schemes) will be included in the deceased’s estate for IHT purposes.
• Tax rate: in the 2026/27 tax year, the standard IHT nil-rate band is £325,000. In addition to this, you have a maximum residence nil-rate band of £175,000, meaning your overall IHT allowance could increase to £500,000. Both the nil-rate band and residence nil-rate band rates have been frozen until 2031. Like the standard nil-rate band, you can transfer any unused portion of your residence nil-rate band to your surviving spouse or civil partner when you die. Overall, a couple could potentially pass on up to £1 million before inheritance tax becomes due. The residence nil-rate band is tapered by £1 for every £2 that your estate exceeds £2 million.
• Exemptions: while unchanged, pension death-in-service benefits will remain exempt from IHT. Pension death benefits paid to a spouse or civil partner still qualify for the 100% spousal exemption and are not liable for IHT. Dependants’ scheme pensions and charity lump sum death benefits will also remain exempt.

Who could be affected?

These changes are likely to impact:

• Individuals with pension savings who plan to leave unused funds to their loved ones.
• Beneficiaries inheriting estates that include pensions and exceed the IHT threshold.
• Estates that were previously below the IHT threshold but may now become liable due to the inclusion of unused pension funds.

The government estimates that around 38,500 estates will pay more IHT under these new rules, and an additional 10,500 estates that were not previously liable for IHT will face a tax bill.[1]

If you have substantial pension savings, these changes could reduce the amount of wealth your loved ones inherit. For example:

• If you have £500,000 in unused pension funds, and your estate exceeds the IHT threshold, the IHT bill on your total estate could be up to £200,000 (40%).

The responsibility for reporting and paying IHT will remain with the personal representatives – the person legally responsible for managing the deceased’s estate and already tasked with handling IHT.

Changes to Agricultural Property Relief (APR) and Business Relief (BR)

The current rules

APR and BR are tax reliefs designed to help families keep their farms and businesses intact without having to sell assets to pay IHT.

• APR: reduces the taxable value of qualifying agricultural property, such as farmland or farm buildings.
• BR: reduces the taxable value of qualifying business assets, such as business premises or shares in private companies.

What’s changed?

From 6 April 2026, there are new limits on how much APR and BR can reduce your IHT liability. These are the key changes:

1. £2.5 million cap on 100% relief 

• Each individual has a £2.5 million allowance for assets that qualify for 100% APR or BR (or both combined).
• This allowance is per individual but can be transferred to a spouse or civil partner, so couples could benefit from 100% relief on up to £5 million.
• For example, if you own £3 million in qualifying assets, only the first £2.5 million qualifies for 100% relief.

2. 50% relief for excess value

• Any qualifying assets above the £2.5 million allowance only receive 50% relief, instead of 100%.
• For example, if your farm is worth £3 million, £2.5 million is fully exempt from IHT, but the remaining £500,000 only receives 50% relief. This means £250,000 is taxable at 40% (£100,000).

3. Reduced relief for Alternative Investment Market (AIM) shares

• From April 2026, shares that are ‘not listed’ but traded on recognised stock exchange markets qualify for BR at 50% instead of 100%.

4. Trusts get their own allowance

• Trusts created before 30 October 2024 have their own £2.5 million allowance for tax relief.
• Trusts created after this date share the £2.5 million allowance with other trusts set up by the same person.
• The £2.5 million allowance for relevant property trusts will refresh every 10 years, so that qualifying agricultural and business property held in that trust benefits from 100% relief up to a value of £2.5 million on each 10-year anniversary charge.

5. Life tenant trusts share allowances

• Trusts where a beneficiary has the right to income (known as Qualifying Interest in Possession trusts) share the £2.5 million allowance with the beneficiary’s personal estate when they pass away.

6. Transitional rules for transfers

• Transfers of qualifying assets made between 30 October 2024 and 6 April 2026 will initially be assessed under the current rules.
• However, if the original owner passes away within seven years, the new rules will apply retroactively.

Who could be affected?

These changes could impact individuals with:

• Farms, agricultural property, family businesses or diversified operations: these businesses may face reduced relief.

Next steps

Now is the time to understand how these reforms could affect your estate and take proactive steps to protect your wealth. Here’s how you can prepare.

1. Review your current investment and IHT strategy

• Pensions in your estate plan: understand the role of pensions in your estate strategy as they will become less tax-efficient for inheritance planning. You may need to work with your wealth manager and/or tax adviser to explore alternative strategies to help achieve your goals.
• Your personal representative: review who you’ve chosen to manage your estate in your will. Ensure they’re prepared for any new responsibilities, especially with changes to IHT rules.
• Agricultural and business property: assess the value of your qualifying assets and how much currently benefits from APR or BR – your wealth manager can support you with this.
• Make the most of allowances: the cap on APR and BR assets means it could be worth reviewing your will. You may want to consider what would be better for your family, using these allowances when the first partner dies or waiting until the death of the second partner.

2. Consider alternative options

Explore strategies to reduce your estate’s IHT liabilities while passing on more of your wealth to loved ones. Some options include:

• Gifting assets: making gifts during your lifetime can reduce the size of your taxable estate. This could include direct gifts or gifting from surplus income – if these gifts don’t affect your usual standard of living.
• Setting up trusts: some trusts can help you manage how and when your wealth is passed on, while also providing potential tax benefits.

Your wealth manager can discuss which options are best suited to your circumstances.

3. Speak to one of our wealth managers

We’re here to help you adapt to these complex changes and work with your tax adviser (where applicable). Our wealth managers can:

• Provide investment planning tailored to your unique situation.
• Keep you informed about when these reforms will take effect and any further updates.
• Help you adjust your estate plan to minimise the impact of these changes.

Find out more from our dedicated support team by calling us on 020 724 61111. Opening hours are Monday to Friday 9am to 5pm.

[1] https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/outcome/inheritance-tax-on-pensions-liability-reporting-and-payment-summary-of-responses

 

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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