Latest Inheritance Tax (IHT) Changes 

Inheritance Tax (IHT) has long been one of the most debated areas of UK tax policy. While only a minority of estates currently pay it, frozen thresholds, rising property values, and major upcoming reforms mean that more families will be affected in the coming years.

This article explains the latest inheritance tax changes, focusing on the new residence-based rules, relief caps, and pension reforms and what they mean for estate planning in the UK.

Shift from Domicile to Residence-Based IHT (from April 2025)

One of the most significant reforms is the move away from the traditional domicile-based system. From 6 April 2025, inheritance tax will be determined by an individual’s UK residence status, not their domicile.

• Who will be caught? Anyone who has been UK resident for 10 of the past 20 years will be subject to IHT on their worldwide assets.
• After leaving the UK: Former residents will continue to fall under the UK IHT net for 3–10 years, depending on their residency history.

• Impact on trusts: Certain trusts with connections to UK residents may see foreign assets pulled into the IHT scope.

This reform particularly affects internationally mobile families and non-doms who previously relied on domicile rules for tax planning.

Caps on Agricultural and Business Property Reliefs (from April 2026)

For decades, Agricultural Property Relief (APR) and Business Property Relief (BPR) have been vital for family farms and businesses, often removing these assets entirely from the IHT net.

From April 2026, these reliefs will be capped:

• 100% relief up to £1 million per individual
• Above £1 million, only 50% relief will apply.

This change could increase tax liabilities for larger family estates, farms, and owner-managed businesses. Farmers’ groups have already warned that the policy may force asset sales or restructuring.

Pensions to Fall Within IHT (from April 2027)

From 6 April 2027, unused pension funds and death benefits will be included in the taxable estate for IHT purposes.

• Who is responsible? Personal Representatives (PRs) will be required to report and pay the IHT due, rather than pension scheme administrators.
• What is included? Unused Defined Contribution (DC) pensions, drawdown funds, and certain lump-sum benefits.
• What remains excluded? Death-in-service payments from registered pension schemes.

This reform is expected to affect tens of thousands of families, with HMRC estimating that many estates will face new average bills of around £34,000.

Frozen Thresholds and Rising Revenues

Even before these reforms, more estates are already paying IHT because the main allowances remain frozen:

• Nil-Rate Band (NRB): £325,000
• Residence Nil-Rate Band (RNRB): £175,000 (for property passed to direct descendants)
  

These thresholds have been frozen until at least April 2028, dragging more estates into the IHT net as property and asset values rise.

• Between April–July 2025, IHT receipts hit £3.1 billion, up £200 million year on year.
• Forecasts suggest revenues could exceed £14 billion by 2029–30 if no further reforms are made.

Key Disadvantages of the New IHT Rules

• Greater exposure for long-term UK residents with worldwide assets.
• Increased costs for farmers and business owners due to capped reliefs.
• Pensions — once a safe inheritance planning tool — now subject to IHT.
• More middle-income families caught due to frozen thresholds.
• Administrative burden shifting onto executors and personal representatives.

What This Means for Estate Planning

These changes underline the importance of proactive estate planning. Steps to consider may include:

• For landlords with property in a limited company – the use of a Family Investment Company structure can help you avoid IHT on the growth in value of the underlying property assets.
• Reviewing residency status if you are internationally mobile.
• Revisiting farm or business succession strategies in light of the £1m relief cap.
• Assessing pension drawdown options before April 2027 to limit future IHT exposure.
• Making lifetime gifts to reduce estate value, though rules may tighten in future.
• Exploring charitable donations, as giving 10% of an estate can reduce the IHT rate to 36%.

Frequently Asked Questions on IHT Changes

What are the new IHT rules from April 2025?

The UK will move to a residence-based system, taxing long-term residents on worldwide assets.

Will pensions be taxed under inheritance tax?

Yes, from April 2027, most unused pension funds will form part of the estate for IHT.

What is happening to business and agricultural reliefs?

From April 2026, 100% relief will be capped at £1 million, with 50% relief above that.

Are inheritance tax thresholds changing?

No they remain frozen at £325,000 (NRB) and £175,000 (RNRB) until at least 2028.

Who should review their estate planning now?

Lanldlords, farmers, business owners, those with large pensions, and internationally mobile families.

The latest IHT reforms mark some of the most significant changes in decades. While they aim to modernise the system, they will increase the tax burden for many families, especially those with farms, businesses, or substantial pension savings.

If you could be affected, it’s essential to review your plans early and seek advice from an estate planning or tax professional.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG