Inheritance Tax

Tax rates and allowances

The inheritance tax (IHT) threshold is currently frozen at £325,000 until 2027/2028. In addition, the residence nil-rate band is also frozen at £175,000. When added to the IHT threshold of £325,000, it allows each individual to pass on £500,000 with no IHT payable - or £1m per couple. There is a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. This is at a withdrawal rate of £1 for every £2 over this threshold. The Autumn Budget announced that these thresholds will now continue to be frozen at these rates for a further two years until 2029/2030.

The rate of IHT remains at 40%.

For a table of the main tax rates and allowances, see here.

IHT on unused pension funds and death benefits

The government intends to bring unused pension funds and death benefits payable from a pension into a person's estate for inheritance tax purposes from 6 April 2027. The intention is to restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 "pensions freedoms" reforms which increased member flexibility over how pension savings could be used.

The government has issued a consultation paper on its proposed changes. Under its proposals the pension scheme administrator will be liable for reporting and paying the inheritance tax and would have to work with the deceased member's personal representatives to establish the amount of inheritance tax due. 

Notably, the government intends that defined benefits lump sum death benefits and pension protection lump sum death benefits will be subject to inheritance tax. At present death in service lump sums and the "5 year guarantee" are usually outside of the scope of inheritance tax as the trustees exercise a discretion as to whom the benefit is paid. The consultation paper says that life policy products will be outside the scope of these changes, and we may see an increase in their use over providing life assurance benefits under a registered pension scheme.

IHT and non-doms

A new residence based regime for inheritance tax will also be introduced from 6 April 2025. This will affect the scope of property brought into the charge to inheritance tax.

Under the new regime, an individual's non-UK assets will be within the charge to inheritance tax if the individual is long-term resident at the time of the relevant chargeable event (including death). An individual will be long-term resident for these purposes if the individual has been resident in the UK for at least ten out of the last twenty tax years immediately preceding the tax year in which the chargeable event arises. However, if the individual leaves the UK, the individual will only remain long-term resident for between three and ten years after leaving the UK depending on how long the individual was resident in the UK.

In addition, subject to transitional provisions, the excluded property status of non-UK settled assets will no longer be fixed at the time the assets are added to a settlement. Instead, non-UK settled assets will only be excluded property at times when the settlor is not long-term resident. As a result, when a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to inheritance tax. An exit charge may also arise where a settlor then ceases to be long-term resident.

For more details of the proposed reforms to the taxation of non-doms, see the Income Tax and NICs section above.

Agricultural Property Relief (APR) and Business Property Relief (BPR)

The government has announced an extension of the scope of the APR to land managed under environmental agreements, with the aim to encourage farmers and land managers to contribute to climate and environmental outcomes without the loss of APR deterring them. Effective from 6 April 2025, the APR reforms will enable land with environmental value under an environmental land management agreement to qualify for APR for deaths and other value transfers. APR will also apply to land under environmental agreements with the UK government, devolved administrations, public entities, local authorities, or certified responsible organisations.

The Autumn Budget also announced that from 6 April 2026, the government will reform APR and BPR. Currently, qualifying agricultural and business assets can receive up to 100% relief and in conjunction with the existing nil-rate bands and exemptions, the full 100% relief will be preserved for the initial £1m of combined agricultural and business property to support family farms and businesses, with the relief rate reducing to 50% for amounts exceeding this threshold. The BPR rate will also be lowered from 100% to 50% for shares classified as "not listed" on the markets of recognised stock exchanges, including AIM, in all circumstances (a list of recognised stock exchanges can be found here).