The UK government has introduced notable reforms to the inheritance tax (IHT) system, aiming to make it fairer and more balanced. These changes target some of the more generous reliefs available to high-value estates, particularly through agricultural property relief and business property relief. They also introduce taxation on unspent pension pots, among other measures.
Let’s break down these adjustments, using clear examples and comparisons to previous rates, to help you understand what they mean for families, small businesses, and large estates.
Key Changes to Inheritance Tax
1. Freezing Inheritance Tax Thresholds Until 2030
- The nil-rate band, the amount of an estate that is exempt from inheritance tax, will stay unchanged at £325,000 until April 2030.
- The residence nil-rate band, which provides additional relief when passing on a family home, will also remain the same at £175,000 and frozen until 2030.
- Combined, this means that an individual can pass on up to £500,000 tax-free, while a married couple or civil partnership can pass up to £1 million without incurring inheritance tax.
- For estates above £2 million, the relief on Residence nil-rate-band of £175,000 starts to reduce (or “taper off”).
2. Adjustments to Agricultural and Business Property Reliefs
- Beginning in April 2026, the government will cap the current 100% rate of agricultural and business property relief at £1 million. Estates will receive 100% relief for the first £1 million in agricultural and business assets, but anything beyond this will receive a 50% relief rate.
- Business property relief, traditionally offering a 100% rate for shares in “not listed” companies (like those on AIM), will also be reduced to a 50% relief rate.
For Example,
Consider a family farm valued at £1.5 million. Under the new rules, the first £1 million in assets would receive 100% relief, meaning no IHT is due on that portion. The remaining £500,000 would qualify for 50% relief, leaving £250,000 subject to IHT at 40%. This reform targets the wealthiest estates without affecting smaller family businesses and farms.
3. Applying Inheritance Tax to Unspent Pension Pots
- Starting April 2027, unspent pension pots will be included in the scope of inheritance tax. Currently, pension pots can sometimes be passed to beneficiaries free of IHT, making them attractive for estate planning.
- The new rule will affect an estimated 8% of estates, preventing large, unspent pensions from being used solely as inheritance tax shelters.
For Example,
Suppose an individual with a £300,000 unspent pension pot passes away. Under the new rule, this amount will be included in the estate’s value, potentially increasing the IHT liability depending on the total estate value.
4. Reforming Domicile Status and Offshore Trusts
- From April 2025, the government will end the concept of domicile status in the tax system, replacing it with a residence-based approach.
- Offshore trusts can no longer be used to shelter assets from IHT, which makes the system fairer and more transparent for UK residents. Non-domiciled individuals opting into this new regime will not pay UK tax on foreign income and gains for the first four years of tax residence.
- The planned 50% tax reduction for foreign income in the first year of residence has also been scrapped, simplifying the tax code and eliminating the benefit of offshore tax planning.
Why These Changes Matter
The majority of estates in the UK do not pay any inheritance tax. According to HMRC, approximately 96% of estates are already exempt due to the current thresholds and reliefs. The government’s intention behind these reforms is to ensure that the wealthiest estates—those with significant business, agricultural, or pension assets—contribute fairly to the public finances. However, family-owned farms and small businesses are protected through the 100% relief on the first £1 million of assets, a measure intended to preserve family legacies without imposing excessive tax burdens.
Summary of Key Changes
- Inheritance Tax Threshold Freeze: Extended until 2030 for both the nil-rate band (£325,000) and residence nil-rate band (£175,000).
- Agricultural and Business Property Relief: 100% relief for the first £1 million in agricultural and business assets; 50% relief for amounts beyond that.
- Unspent Pension Pots: Included in IHT from April 2027, affecting about 8% of estates.
- Domicile Reform: A shift to residence-based taxation, ending offshore trust shelters and the remittance basis for non-domiciled individuals from April 2025.
Example Calculation: Before and After
Let’s take a high-value estate worth £2 million, with £1.2 million in agricultural property:
- Current Rules: Full 100% relief on agricultural property could apply, meaning no IHT on the £1.2 million.
- New Rules (From April 2026): The estate receives 100% relief on the first £1 million of agricultural property and 50% relief on the remaining £200,000, meaning £100,000 of this value will be subject to IHT.
These adjustments aim to create a fairer inheritance tax system that supports small businesses and family farms while ensuring the wealthiest estates make a proportional contribution.
Final Thoughts
The updated inheritance tax measures are part of a broader government effort to balance public finances while maintaining fairness in the tax system. For families, farmers, and business owners, these changes emphasise the importance of careful planning, particularly in high-value estates. By focusing reliefs on modest estates and family-owned businesses, the government aims to protect the interests of most taxpayers while ensuring that the wealthiest estates contribute to public funding.
As these changes approach, many may benefit from consulting tax advisors to adapt estate plans in line with the new regulations and make the most of available reliefs.
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