Inheritance Tax (IHT) is often seen as a complex and daunting topic, yet its implications can have a significant impact on the financial well-being of individuals and families.
From exploring the Government’s recent and significant reforms to understanding key exemptions and effective planning strategies, we’ll break down what you need to know in clear, straightforward terms.
IHT Allowances Frozen Until April 2030
The Nil-Rate Band (NRB) of £325,000 and the Residence Nil-Rate Band (RNRB) of £175,000 will remain frozen until April 2030. With asset values generally rising, the “fiscal drag” means that more estates will incur an IHT liability. The key message to take away here – is not to delay; the aforementioned fiscal drag means that HMRC Inheritance Tax receipts are at a record high.
The most powerful way of addressing this is still “lifetime gifting”, ensuring that you make use of the following IHT exemptions:
- Annual gift exemption of up to £3,000 per donor
- Small gift allowance – you can give as many gifts of up to £250 to as many individuals as you want, although not to anyone who has already received a gift from you as part of your £3,000 annual exemption.
- Wedding/civil partnership gifts – £5,000 to your child, £2,500 to your grandchildren/great-grandchildren, and £1,000 to a friend or other relatives.
The benefit of the above gifts is that they fall out of your estate immediately. The IHT tax relief on other gifts works on a sliding scale whereby after seven years no tax is liable for the sums gifted. This is known as IHT taper relief. If you die before seven years from the date of gifting, you will be liable to pay tax on the gifted amount, in line with the below rates:
With this in mind, it is also possible to do more strategic gifting, such as passing assets directly to individuals (Potential Exempt Transfer or PET) or directly into a trust (Chargeable Lifetime Transfer or CLT). This will start the seven-year clock (and aforementioned taper relief will apply) at which point the asset will no longer be part of your estate. For PET’s and CLT’s is important to take professional advice as they can have additional tax implications that may need to be considered, so advance planning is key.
The final way to minimise your tax liability is by using the IHT exemption for gifts out of surplus income. You will need to provide evidence to HMRC, but if you qualify this is a powerful tool you can use to make tax-exempt gifts that don’t rely on you living for a further seven years. The criteria are as follows:
- Payments must be made out of surplus income (pensions, dividends, interest) and not out of capital (selling shares or savings).
- You must be able to evidence that by making these gifts, you can maintain the same standard of living.
- Crucially, these gifts must be part of a regular pattern of giving – for example monthly payments, or school fees.
Significant Changes to Agricultural & Business Relief
From April 2026, changes are being made to Agricultural Relief and Business Relief – previously, the 100% relief was unlimited, but a £2.5million cap per individual will be put in place, with a 50% relief available on the excess. For example, this would mean that if your shares in your own business are valued at £3 million on your death, your family would be faced with an IHT bill of £100,000 on these shares alone, or for a farming business worth £6 million, the IHT liability would be £700,000.
If this is likely to affect you and your business, then succession planning is vitally important. Can shares be held between you and your spouse or passed on to the next generation so that multiple £2.5 million allowances can be utilised in the future?
Or if the value of your shares/business assets are more than £2.5 million, can plans be put in place to meet the effective 20% IHT charge on the excess? For example, taking out insurance or ensuring that there is liquidity within your business.
Another change was made for holders of AIM shares – IHT relief from April 2026 will be cut from 100% to 50%, meaning those assets that you thought would be free of IHT may now be subject to an effective 20% IHT charge.
If you have an AIM share portfolio, the change from being IHT exempt to a 20% tax charge is significantly less attractive now. Perhaps this is the time to review these and possibly consider an alternative IHT planning strategy.
(n.b. when first announced the reliefs were originally capped at £1m, this article has been updated to reflect the announcement in December 2025 that the cap would be raised to £2.5m per individual).
Inherited Pensions to Become Liable to IHT (from 6 April 2027)
Most unused pension funds and death benefits are set to fall within the scope of IHT. This is a major shift from their current largely IHT-exempt status, and a key structural change for how IHT is applied – meaning it’s important to bring pensions into estate planning conversations sooner rather than later.
It is important to review your Death Benefit nominations, ensuring that they are up to date and reflect your wishes. The spouse exemption for passing pensions is likely to remain in place, meaning it would be exempt from IHT on the first death.
With strategic planning, the need to find the right balance between your income needs and your potential IHT savings is important, particularly for those with large pension pots and sufficient income from other sources. It is important to be aware of the income tax implications of drawing from your pension pot but with the right planning and a careful drawdown strategy, you could reduce the IHT burden.
Speak to your IFA about how these changes will affect you. If you don’t currently have an IFA please contact us and we can put you in touch with someone.
A new Residence-based IHT system for non-doms took effect from 6 April 2025.
The new system will see the estates of non-domiciled individuals that have been UK residents for 10 years being liable to UK IHT on all of their worldwide assets. This is a significant change for non-doms that previously would have only been subject to IHT on their UK assets.
If you are a non-domicile and approaching 10 years of UK residence, you may need to act fast and review your worldwide assets. Is there an opportunity for you to make a gift of a non-UK asset before you meet the 10-year threshold?
Also, for those leaving the UK, the introduction of a new 10-year “tail” means your worldwide assets could still be subject to UK IHT after you have left. It is becoming more essential than ever to put a strategy in place to mitigate this.
These changes have radically altered the IHT landscape, and although complex, they do give rise for planning opportunities. Now is the time to review your wills and your current estate planning and assess what impact the new rules may have on you. This will give you the best opportunity to ensure that you protect your assets and pass them on to your loved ones in the most tax-efficient way.
How Foxley Kingham can support you
For personalised advice or a deeper discussion about how these changes might affect you, we’ve got you covered. Call us directly or fill out our contact form to connect with our tax experts for a no-obligation consultation. Whether you need tailored IHT planning strategies, or guidance on estate planning, we’re here to support you every step of the way.