Inheritance Tax (IHT) is changing – Why you need to review your Will

By Steven Whiting, Senior Associate 

As the new tax year approaches, many individuals will be facing significant changes to the rules surrounding Inheritance Tax (IHT).

With property values steadily rising and the government freezing IHT thresholds until at least 2031, more estates will find themselves affected by IHT, even if the individual circumstances of the deceased haven’t changed.

We want to help you understand the changes and why it’s more important than ever to review your Will and estate planning regularly to ensure your legacy is protected.

What is Inheritance Tax (IHT)?

Inheritance Tax is the tax charged on the estate of someone who has passed away, including their property, money and possessions.

The tax, which is typically charged at 40 per cent, only applies if the estate’s value exceeds certain thresholds.

The core of the IHT system is comprised of two main components:

• The Nil-Rate Band: This is the amount of the estate that is exempt from IHT. Currently, the nil-rate band stands at £325,000.
• The Residence Nil-Rate Band (RNRB): An additional allowance available when the family home is passed to lineal descendants, such as children or stepchildren and their offspring. The RNRB can increase the tax-free allowance if the conditions are met, although this is limited to the value of the deceased’s home if the home is worth less than the available RNRB.

This allowance can be passed to a surviving spouse, which means that a married couple or civil partners can pass on up to £1 million tax-free to beneficiaries if certain conditions are met*.

Key changes to IHT: What you need to know

Here are the key changes on the horizon that you need to be prepared for:

Freeze on the Nil-Rate Band and Residence Nil-Rate Band

The Government has announced that both the Nil-Rate Band (NRB) and the Residence Nil-Rate Band (RNRB) will be frozen until at least April 2031.

This means the thresholds for IHT outlined above won’t increase in line with inflation for the foreseeable future.

For many families, this will result in an unintended increase in the tax they may owe.

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

The Government is also making changes to the Agricultural Property Relief (APR) and Business Property Relief (BPR), both of which are designed to reduce the IHT liability on farmland and business assets.

• APR offers IHT relief on agricultural land and buildings, making it easier to pass farmland down to the next generation without incurring large tax bills. APR can provide up to 100 per cent relief if the land has been owned for at least two years and used for qualifying agricultural purposes.
• BPR provides 100 per cent IHT relief on business assets, such as shares in a family business or unquoted companies, which can reduce or eliminate IHT on these assets.**

From April 2026, these reliefs are being restructured and only the first £2.5 million will benefit from relief.

Any amount above this will only benefit from 50 per cent relief, meaning it will effectively be taxed at 20 per cent. Any unused allowance can be passed to a surviving spouse or civil partner.

This change makes it more important for farming families and business owners to consider how they will pass on assets to future generations and whether any changes need to be made to their Will to ensure they can still benefit from these reliefs.

The Impact of Pensions on IHT: A New Change Coming in 2027

Most pensions were traditionally exempt from IHT, but starting in 2027, pensions will now form part of an individual’s estate for IHT purposes.

This change could have a major impact on the IHT liability of individuals with significant pension pots, so it’s essential to review the structure of your pension schemes to mitigate any additional tax burden.

More details are soon to follow on this change but combined these reforms to IHT could result in many more families facing a tax bill in future.

Time to review your Will and estate

Given the complexity of these changes, now is the perfect time to revisit your Will and estate planning strategy to ensure that your wishes are honoured and that your loved ones won’t be burdened with a significant IHT liability.

Here are a few key steps you should consider taking:

• Assess your assets: Understand the total value of your estate, including property, savings, pensions and investments. If your estate has increased in value, you may now fall within the IHT net and need to plan for this.
• Review your Will: Ensure that your Will accurately reflects the value of your assets and the individuals or organisations you want to benefit from your estate. How certain assets are distributed could affect your IHT liabilities.
• Consider gifting or using trusts: There are tax-efficient strategies available, such as lifetime gifting and setting up trusts, that can help reduce your IHT liability and pass assets on to your beneficiaries before you pass away.
• Understand changes to APR and BPR: If you own farmland or a business, ensure that you are aware of the changes to these reliefs and how they will impact your estate. It’s important to act now to ensure that your assets are protected.
• Seek professional advice: As IHT becomes more of a concern for more families, it’s important to consult with a legal expert who can help guide you through these changes and create an estate plan that works for you and your loved ones.

Be proactive, not reactive on IHT

IHT is a complex area and with the changes to the thresholds and the introduction of pensions into the IHT net, it’s more crucial than ever before to act sooner rather than later.

Reviewing your Will and making adjustments to it throughout your life can help ensure that your estate is as tax-efficient as possible and your loved ones are not caught off guard by unexpected tax liabilities.

If you would like to discuss your estate planning or have any concerns about how these changes may affect your estate, our experienced team at Hethertons Solicitors is here to help.

* Any non-exempt gifts made in the 7 years before your death can reduce this figure.

** Certain types of businesses do not qualify for BPR, such as property investment companies.