How inheritance tax is changing from 2025

Inheritance tax is becoming a fast-growing topic of conversation for more and more people now – no longer only relevant to the “ultra-rich” as it may have once been perceived to be reserved for. The reality now is that what is generally considered to be the “average” taxpayer is likely to soon become subject to inheritance tax themselves, and you may not realise just how quickly or easily you would fall into this group.

Since the Autumn Budget of 2024, inheritance tax has been changing, and more changes are to come over the next few years. From April 2026, reforms to business and agricultural reliefs will reduce the tax advantages many families have relied on for years. Then, in April 2027, unused pension funds will start to count towards inheritance tax for the first time.

So, even if you’ve never thought inheritance tax applied to you, now is the time to take notice. Understanding these reforms and planning ahead could make a real difference to how much of your hard-earned wealth is passed on to the people you care about most.

What was announced in the 2024 Autumn Budget?

In her first Budget, delivered in October 2024, Chancellor Rachel Reeves pledged not to increase taxes on working people. Yet her announcement on changes to inheritance tax indiscriminately impacts working people, families, and business owners alike. Her reforms include:

• From April 2025, the non-dom tax regime is abolished and replaced with a new residence-based regime meaning foreign assets can now be subject to UK inheritance tax rules.
• From April 2026, Agricultural Property Relief (APR) will be capped at £1 million of the combined value that is included in an individual’s estate.
• Also from April 2026, Business Property Relief (BPR) will too be capped at £1 million of the combined value that is included in an individual’s estate.
• From April 2027, any unused pension funds that are passed on will be liable to inheritance tax.
• Furthermore, the inheritance tax nil-rate bands will remain frozen until April 2030

How have the inheritance tax rules changed in 2025?

Since April 2025, a significant tax change was implemented that not only affects inheritance tax but income tax, capital gains tax (CGT), and trust taxes too.  As a result of the abolished non-dom tax regime that has been replaced with new residence-based rules, it means that those who do not permanently reside in the UK but still spend considerable amounts of time in the country may have their worldwide assets (including offshore trusts) taxed as part of their estate for UK inheritance tax purposes. Previously, under the old domicile rules, if you were not domiciled in the UK, it meant your foreign assets fell outside the scope of UK tax unless it was brought into the country.

Although this inheritance tax change mostly applies to those who are not originally from the UK, it will also affect you if you are from the UK and have lived outside of the country for several years owning assets elsewhere, as well as if you have lived in the UK for a while and plan to leave. As of April 2025, a new tax category referred to as “Long Term Resident” (LTR) has been introduced which applies to anyone who has been a UK resident for at least 10 of the previous 20 years. If you meet this threshold, you are considered an LTR and your worldwide assets become liable to UK taxes. If you do not meet qualify under this guideline, then only your UK assets are subject to UK taxes.

For those who have resided in the UK and now wish to leave, this does not immediately allow you to escape a potential inheritance tax liability. Instead, your inheritance tax exposure will gradually fade depending on how long you have been in the UK. If you have lived in the UK for between 10 – 13 years, then you’ll remain potentially liable for 3 years. If you have lived in the UK for 20 years and over, then you’ll remain potentially liable for the full 10 years maximum limit.

What are the inheritance tax changes coming in 2026?

The inheritance tax rule changes that are due to come in April 2026 will most directly affect farm and landowners as well as business owners. Farming was historically a generational industry, usually passed down through families, but today tax is just one of the many extreme challenges the sector is facing.

Agricultural Property Relief (APR) has long been an essential tax relief for farmers and landowners that enables them to pass on down agricultural land and property to their heirs without excessive tax burdens. Under current rules, qualifying agricultural property which includes working farmland, farm buildings, and farmhouses used in conjunction with the land itself, can receive 100% tax relief from inheritance tax. This essentially means that the value of these types of properties and assets are removed from the deceased’s taxable estate so long as further conditions are also met (such as an active use, continuing of the farming activity, and occupation of land by the deceased).

From 6 April 2026, the rules on APR are changing drastically (especially where it coincides with Business Property Relief (BPR) which we’ll also explain further on in this section). The government has announced that only the first £1 million of combined qualifying property assets (i.e. qualifying property assets for both APR and BPR) will continue to receive 100% tax relief from inheritance tax, any value over this threshold will then only receive 50% relief.

What’s more, this limit will also be applied to trusts holding agricultural property or business property. The new regime will apply to exit charges and 10-year anniversary charges using the £1 million allowance. Anything beyond the allowance will only receive tax relief at 50%.

This new regime will similarly apply to BPR assets. It means that it’s not just farmers that are affected by the coming inheritance tax changes, but also business owners regardless of whether you’re a sole trader, a partner in a partnership, a director (and shareholder) of your own limited company or even just a shareholder in an external company. Where you own assets that qualify for BPR, then these assets once part of your estate are subject to the £1 million threshold and again, any value in excess of this will only be eligible for 50% tax relief and therefore subject to inheritance tax.

In the event that you own assets qualifying for both APR and BPR, the £1 million threshold will apply to their total combined value. Nevertheless, it is important to emphasise that the £1 million threshold is one that only applies to qualifying assets, not a blanket threshold on estates that include such assets. So, to use an example to clarify: if you own an estate worth £2 million but only £700,000 of it qualifies for APR then £700,000 will remain 100% exempt from inheritance tax (because it is under the threshold), whilst the remaining value of your estate above the nil rate band will be subject to 40% inheritance tax. In practice it means up to £1.5 million can be passed on inheritance tax-free, but unlike the nil rate band and residence nil rate band, the £1 million APR/BPR threshold is non-transferable between spouses and civil partners.

It is estimated that by 2026-2027, around 2,000 estates will pay more inheritance tax than before under the old tax relief rules. Of that 2,000, it is predicted that over 500 estates claiming APR will be affected. If you’re concerned that you may fall into this, then practical steps can include revaluing farm assets in advance of the change, revisiting wills and will clauses to ensure the £1 million allowance is utilised effectively, considering the possibility of  phased transfers or lifetime gifts, and assessing whether parts the farm can be restructured to fall under relief caps optimally.

How will pensions be impacted by the April 2027 inheritance tax change?

The planned upcoming changes to inheritance tax rules when it comes to pensions will affect all families, regardless of whether they are farm owners or business owners. At the moment, you can pass on any of your unused pension fund to your spouse, children, or other beneficiary inheritance tax-free because pensions are not considered part of your estate. From April 2027 however, they will no longer be treated this way and become part of your estate, therefore potentially at risk of triggering an inheritance tax bill

Under the coming new rules, any unused pension pots (including defined contribution pensions) will be included as part of the deceased’s estate. For families that hold substantial assets such as a family home, an investment portfolio, significant savings, ISAs, and current accounts, as well as personal valuables, it becomes likely that the total value of your estate will get pushed above the nil rate band threshold, thereby exposing you to the standard 40% inheritance tax rate.

Whilst the spousal exemption remains, protecting transfers of any type of assets from tax between married spouses or civil partners, it may mean that once the surviving spouse passes, the combined estate will face a much larger tax bill. In fact, it’s predicted that this change will result in around 10,500 more estates being faced with an inheritance tax charge for the first time, whilst a further 38,500 estates which would ordinarily be subject to inheritance tax anyway will have to pay more. This coming reform only highlights the importance of proactive tax planning for families who want to ensure their loved ones remain well provided for.

What is the impact of freezing the inheritance tax thresholds until 2030?

The main inheritance tax threshold, known as the nil-rate band, has been frozen at £325,000 since 2009. This means you can leave up to £325,000 of your estate to your beneficiaries without paying inheritance tax. In addition, there’s an extra allowance called the residence nil-rate band (RNRB), which lets you pass on up to £175,000 tax-free, provided it relates to the value of your main home and is inherited by a direct descendant, such as a child or grandchild. That means that most people are able to pass on £500,000 tax-free, or a couple is in theory able to pass on £1 million when their estates are combined and if both individuals’ threshold remains fully available.

Originally, these bands were meant to rise with inflation. However, the previous government extended the freeze until at least April 2028 and now, the current government extended this freeze until at least April 2030, effectively holding them steady for nearly two decades. The effect of this is that more people become pulled into the scope of having to pay inheritance tax on their estate because over time property prices, investments, and pensions are likely to increase in value (this is what is known as fiscal drag).

This is already proving to be the case as it was reported that in 2010, only 2.6% of estates in the UK had to pay inheritance tax. Whereas in 2024, this figure has jumped to over 6% of all estates. It’s estimated that this will rise to around 8% – 10% come 2028 if thresholds remain frozen at their current limits.

Get help with mitigating your inheritance tax exposure

Inheritance tax is no longer just a concern for the ultra-wealthy — with frozen thresholds, rising property values, and the upcoming changes to pensions, APR, and BPR, more family estates are being pulled into the IHT net than ever before. However, there are certainly effective solutions that can be implemented and being proactive as early as possible before some of these changes are due to come into force can go a long way to making a big difference. Discuss your legacy goals with us today and let us help you plan for your future.