Inheritance tax: what's changed and what's coming

Inheritance tax has moved more in the last two years than it did in the previous twenty. Four changes matter, and the biggest one is still ahead of us.

Most people's understanding of inheritance tax is a few years out of date, and that isn't their fault. The rules have shifted repeatedly since 2024, and the single largest change hasn't even landed yet.

There are four things worth understanding. The tax-free thresholds have been frozen so long they're quietly catching people who never thought of themselves as wealthy. The relief that protected businesses and farms was capped for the first time in April 2026. Pensions, which have always sat outside inheritance tax, get pulled into it in April 2027. And if you've any connection to another country, the rules changed completely in April 2025 and they follow you even after you leave.

How it actually works

Everything that has changed builds on the same basic structure, so it's worth grounding first.

When you die, everything you own is added up. Your home, savings, investments, any business or land, your possessions, money owed to you. Deduct what you owe and what's left is your net estate. Against that you set your tax-free allowances, and anything above them is taxed at 40%.

Be clear on what that means, because people panic about it. It's 40% of the amount over your allowances, not 40% of the whole estate. If you're £100,000 over, the tax is £40,000.

The main allowance is the nil-rate band, £325,000 each. There's a second one, the residence nil-rate band, worth up to £175,000 each, but it comes with conditions. You only get it if you own a home and it passes to direct descendants. Leave the house to a sibling or a friend and you don't get it.

One practical point that catches families out. The tax is paid by your executors out of the estate, and much of it falls due six months after death, often before the family can access the money or sell anything to cover it. The bill can arrive before the cash to pay it does.

The spouse exemption and the second death

One exemption sits above the rest. Anything you leave to your husband, wife or civil partner is completely free of inheritance tax, with no limit at all.

Unused allowances pass across too. So when the first of a couple dies leaving everything to the other, there's usually nothing to pay, and the survivor picks up the unused allowances on top of their own.

Which is why, for most married couples, the first death isn't the problem. The bill lands on the second death, when everything passes down to the children and there's no spouse left to receive it tax-free. Every one of the four changes below is aimed at that second death.

Change one: the frozen bands

The £325,000 nil-rate band hasn't moved since 2009, and it's frozen until 2031. That will be twenty-two years at the same figure, while house prices have done what house prices have done.

Take a married couple in their seventies with a home worth £800,000, which across much of the country is unremarkable, plus £250,000 in savings and investments, and a couple of pensions. That's an estate comfortably over a million pounds. Fifteen years ago they wouldn't have described themselves as wealthy and may have had no inheritance tax problem at all. Today they have a real one, and usually no idea.

Put numbers on it. With the full million of allowances between them, an estate of £1.05 million leaves £50,000 taxed at 40%, so £20,000. Push the house to a million, which plenty now are, and the estate is £1.25 million and the tax is £100,000. The couple still don't feel wealthy.

That's fiscal drag, and it only moves one way. The threshold stays still, your house climbs, and the gap is taxed.

The million-pound myth

You will have heard that a couple can pass on a million pounds tax-free. That's true, but only in the right circumstances, and it's where families quietly lose money.

The million comes from stacking two nil-rate bands and two residence bands. But the residence band starts being withdrawn once the estate exceeds £2 million, at a rate of £1 for every £2 over. So an estate around £2.7 million has lost the whole thing across both spouses. That's £350,000 of allowance gone and £140,000 of extra tax, simply for being over the line.

The transfer of a late spouse's allowances also has to be actively claimed, and families do miss it. And the way wills and ownership are structured can waste a band without anybody noticing until it's too late.

Change two: business and farm relief capped

For decades, business property relief meant that a trading business or shares in an unquoted trading company, held for two years, could pass down entirely free of inheritance tax. No limit. Agricultural property had its own equivalent.

From 6 April 2026 that relief is capped. You get full relief on the first £2.5 million of qualifying business and agricultural property, and above that the relief halves, so the excess is effectively taxed at 20%.

The figure moved during the policy's development. It started at £1 million, there was considerable backlash, and in December 2025 it was raised to £2.5 million per person. It passes between spouses, so a couple can shelter up to £5 million at full relief, and with the ordinary allowances on top a couple can pass on a business or farm worth well over £5.5 million before any of this bites.

For a lot of family businesses the cap therefore changes nothing. A company worth two million owned between spouses is unaffected.

Above those levels it's a different story. A trading business worth £4 million owned in one name gets full relief on the first £2.5 million, then half relief on the next £1.5 million, leaving £750,000 taxable. At 40% that's a £300,000 bill where three years ago there was none.

Take the same £4 million business owned equally between two spouses and each has a £2.5 million allowance, so the whole thing passes at full relief and the bill is nil. Same business, same value, different ownership, a £300,000 swing. Which is why, above the cap, this needs looking at rather than assuming.

One further point for anyone holding AIM shares. They used to attract full relief and now get 50%. If part of your planning leaned on an AIM portfolio, it's doing half the job it was.

Change three: pensions from April 2027

This is the big one, and there's still time to do something about it.

At the moment your pension sits outside your estate. Die with money left in it and it passes to your beneficiaries free of inheritance tax. For a lot of people that has quietly been the single best piece of inheritance tax planning they own, and the standard advice for years has been to spend everything else first and leave the pension untouched.

From 6 April 2027 that stops. Unused pension funds are brought inside the estate and taxed at 40% like everything else.

It can be worse than a straight 40%, because of a second charge most people don't know about. If you die after 75, your beneficiaries also pay income tax at their own rate when they draw the money out. That income tax already exists. Put the two together from 2027 and a pension passed on after 75 can be taxed twice, with the combined effect taking well over half of it.

Say you die with £500,000 left in your pension. Today it passes to your children free of inheritance tax. From April 2027, if you're already over your allowances, £200,000 goes immediately in inheritance tax, and your children then pay income tax on what remains as they draw it.

What to do about it's genuinely personal. Pensions still carry real advantages while you're alive, so overreacting is its own mistake. The right answer depends on your age, health, other assets, income needs and family. But the old rule of always leaving the pension until last may no longer hold, and the deadline is fixed. If your pension has quietly been your inheritance tax plan, that plan expires in April 2027 whether you've looked at it or not.

Change four: residence replaces domicile

For as long as anyone can remember, inheritance tax hung on domicile, a slippery test about where you really belonged. A great deal of planning was built around being non-domiciled and keeping overseas wealth outside the UK net.

Since April 2025 that system has gone, replaced by something much simpler and much harder to argue with. Broadly, once you've been UK resident for ten of the last twenty tax years, your entire worldwide estate falls within UK inheritance tax. Property abroad, overseas accounts, foreign investments, all of it.

The part that surprises people most is what happens when you leave. You don't drop out immediately. There's a tail, and its length depends on how long you were here. Around ten to thirteen years of residence gives a three year tail, and it extends from there up to a maximum of ten years for someone resident twenty years or more.

So somebody who lived in the UK most of their adult life, retired abroad and assumed they had cut the cord can still have their whole worldwide estate exposed for up to a decade afterwards. Leaving the UK is far more of a timing exercise than people assume.

Working out where you stand

You can't do a full plan in your head, but three honest questions will tell you most of what you need to know.

First, what's your estate actually worth? Add the house at today's value rather than what you paid, the savings and investments, any business or land, and now the pension, because from 2027 it counts. Most people get a surprise here, partly because they forget how far the house has run and partly because they have never counted the pension.

Second, what allowances do you really get? Start from £325,000 each, add the residence band only if your home is genuinely passing to children or grandchildren, and reduce it if the estate is over £2 million. The real figure is usually lower than people assume.

Third, which of the four changes actually hits you? Frozen bands catch almost everybody with a decent house. The pension change hits anybody leaving a pot behind. The business cap hits owners and farmers above the threshold. The residence rules hit anybody with a life in more than one country. Most people are caught by at least one and plenty by two or three.

What can be done

It isn't all one way, and almost all of the planning available works better the earlier you start.

The most important principle is the simplest. Give something away in your lifetime, survive seven years, and it's out of your estate completely. That sits behind a great deal of planning, and it's why time matters more than anything else. The families who pay the least are almost never the ones who left it late.

Beyond that there are annual allowances most people never use, trusts for passing wealth down while keeping control, insurance that can fund the bill so the family isn't forced to sell, and charitable giving that can reduce the rate itself.

One warning before trying anything yourself. You can't give something away and carry on using it as though it's still yours. Signing the house over to the children while continuing to live in it doesn't work. The house stays in your estate, seven years or not. There are ways to deal with the family home, but the do-it-yourself version usually produces the worst of all outcomes.

If you would like to understand where your own estate stands against all of this, get in touch with us at Saymur.