Inheritance tax (IHT) used to be something only the very wealthy planned for. Allowances have been frozen for years and big changes are now arriving for business owners, farmers and anyone with a pension, so more families are being caught.
The basics
- Nil-rate band: £325,000 per person.
- Residence nil-rate band: up to £175,000 more when your home passes to children or grandchildren. It is tapered away for estates over £2 million.
- Transfers between spouses and civil partners: these are generally exempt. Unused allowances can also pass to the surviving spouse, so a couple can potentially pass on up to £1 million IHT-free.
- Tax rate: 40% on the estate above the available allowances, or 36% if at least 10% of the net estate is left to charity.
What has changed
1. Business and agricultural property relief are capped (from 6 April 2026).
Qualifying business and farm assets still get 100% relief, but only up to a combined £2.5 million per person. Relief above that is 50%, so the excess is taxed at an effective 20%. Unused allowance can pass to a surviving spouse or civil partner. Relief on AIM shares is now 50%. The tax on qualifying assets can be paid in interest-free instalments over 10 years.
2. Pensions come into IHT (from 6 April 2027).
Most unused pension funds and death benefits will count as part of your estate. For many people that changes the order in which they should draw on savings and pensions.
Planning ideas worth discussing
- Use the £3,000 annual gift exemption, and gifts made out of surplus income, which are exempt immediately if properly documented.
- Larger lifetime gifts fall out of the estate after seven years.
- Review wills, especially where a business or farm is involved, to make the best use of both spouses’ £2.5 million relief.
- Look again at pension drawdown plans now that pensions will count from 2027.
- For company owners, keep shares qualifying for Business Property Relief. See owner-managed companies.
When someone has died
If you’re dealing with an estate now, our sister firm Clear Probate handles probate applications and estate administration on fixed fees. See Probate and estate administration.
This article is general information, not personal advice. Please speak to us about your circumstances. Sources: GOV.UK.