Inheritance Tax – A Brief Overview
Inheritance Tax (IHT) is often described as one of the UK's least popular taxes, and with good reason. At a headline rate of 40%, it can create significant concern for individuals and families, particularly where valuable assets are involved. As a result, effective IHT planning often needs to be considered well in advance.
Every individual subject to UK IHT benefits from a Nil Rate Band (NRB) of £325,000, meaning this portion of their estate is free from IHT. Some may also qualify for the Residence Nil Rate Band (RNRB) of up to £175,000, subject to certain conditions being met.
This article focuses on two other key reliefs — Business Property Relief (BPR) and Agricultural Property Relief (APR) — both of which are set to change from April 2026. It also highlights proposed changes to the IHT treatment of unused pension pots from April 2027.
Since the initial announcement in the Autumn 2024 Budget, there have been two important revisions to the BPR and APR proposals, both favourable to taxpayers. These updates are reflected below.
Background to BPR and APR
BPR has long been available to business owners, entrepreneurs and investors who hold qualifying business assets. Currently, it can provide 100% IHT relief on qualifying business assets, and 50% relief on land, buildings and machinery used in a business.
While the detailed rules are beyond the scope of this article, qualifying assets typically include trading businesses or shares in private companies that are wholly or mainly trading.
APR operates in a similar way but applies to agricultural land, farmland and certain agricultural properties, provided the relevant conditions are met.
Historically, the availability of 100% relief under BPR and APR has allowed business and agricultural assets to pass between generations without triggering an IHT liability. However, this position is set to change significantly from 6 April 2026.
Changes to BPR and APR from 6 April 2026
Under the proposed reforms, a £2.5 million cap will be introduced. From this date, individuals will only be able to claim 100% relief on the first £2.5 million of combined business and agricultural property.
When the changes were first announced, the cap was set at £1 million, but following strong representations from farmers and business owners, the Government increased this to £2.5 million.
Any qualifying business or agricultural assets above £2.5 million will only attract 50% relief, leaving the remaining value exposed to IHT.
A further positive development is that the £2.5 million cap will be transferable between spouses. We will need to wait for the legislation to be published for full details of how the 'transferrable' BPR and APR relief between spouses or civil partners will work in practice, but in short, married couples or civil partners could benefit from up to £5 million of assets qualifying for full BPR or APR.
Impact on Trusts
The changes will also affect trusts holding BPR assets. At present, trusts invested solely in BPR-qualifying assets are exempt from both 10-year charges and exit charges.
From 6 April 2026, however, a 3% charge will apply every ten years on the value of trust assets exceeding £2.5 million.
Importantly, this £2.5 million limit will apply across all trusts created by the same individual after 30 October 2024, rather than on a per-trust basis.
These reforms represent a significant shift in the UK IHT landscape. A key concern is that families inheriting business or agricultural assets may face substantial IHT bills without having the liquid funds available to pay them, potentially forcing the sale of assets.
Example
Consider a family-owned trading business valued at £8 million, owned jointly by a husband and wife.
- Before 6 April 2026:
If both spouses died before this date, the entire £8 million would qualify for 100% BPR, resulting in no IHT liability.
- On or after 6 April 2026:
The first £5 million (using both spouses' caps) would qualify for full relief. The remaining £3 million would receive only 50% relief, leaving £1.5 million exposed to IHT.
Assuming the Nil Rate Band has already been used elsewhere in the estate, this £1.5 million would be taxed at 40%, creating an IHT liability of £600,000.
In many cases, liabilities of this size would need to be settled from the estate, which could create cash-flow challenges and lead to asset sales.
Impact on Me?
Anyone with business or agricultural assets valued above £5 million is likely to be impacted by these changes from April 2026.
There are planning opportunities available ahead of this date, but effective action requires time. Taking advice early can help reduce future IHT exposure, preserve family assets, and minimise the risk of forced sales due to liquidity pressures.
IHT Changes for Unused Pensions
Currently, pension pots sit outside the scope of IHT. If an individual dies before age 75, their beneficiaries can usually receive the pension fund tax-free. If death occurs after age 75, beneficiaries pay income tax on withdrawals, but no IHT is due.
From 6 April 2027, this is set to change. Under the proposals, unused pension funds will be included in an individual's estate for IHT purposes.
If the value of the pension pushes the estate above the available NRB, the excess will be subject to IHT at 40%. The main exception is where the pension is left to a surviving spouse, in which case the usual spouse exemption applies.
In addition, beneficiaries would still pay income tax on withdrawals, creating the potential for a double tax charge.
Impact on Me?
Many individuals have historically viewed pensions as an efficient way to pass wealth to the next generation. Leaving pension funds untouched for as long as possible often made sense from an IHT perspective.
Under the new rules, this strategy may no longer be appropriate. In some cases, the value of a pension could even cause an estate to lose entitlement to the Residence Nil Rate Band, leading to further unexpected tax consequences.
These proposed reforms mark a major change in how both business assets and pensions are treated for IHT. As a result, many people who previously gave little thought to estate planning may now need to reconsider their position.
Planning early can help reduce the tax burden on your estate and protect the value passed on to your beneficiaries. If you would like to discuss how these changes may affect you, please get in touch.