New Inheritance Tax rules

by Michael Blaken

The UK’s inheritance tax (IHT) landscape is undergoing its most significant transformation in decades, with the first major changes having taken effect in April 2026.

Reforms introduced in April 2026

For years, family farms and private businesses were often entirely exempt from inheritance tax through Agricultural Property Relief (APR) and Business Property Relief (BPR). That is has now changed.

• The £2.5 Million Cap: A new combined limit of £2.5 million applies to assets qualifying for 100% APR and BPR.
• The 20% ‘Excess’ Tax: Any qualifying value above this £2.5 million threshold only receives 50% relief. This effectively means the excess is taxed at 20% (half the standard 40% rate).
• Spousal Transfers: Crucially, this £2.5m allowance is transferable between spouses and civil partners. This means a couple can effectively protect up to £5 million in business or agricultural assets before the 20% tax kicks in.
• AIM Shares: If you hold shares on the Alternative Investment Market (AIM) for tax planning, note that they no longer qualify for 100% relief. They now receive a flat 50% relief across their entire value, regardless of the £2.5m cap.

The pension loophole closes: April 2027

Historically, pensions have been one of the most effective ways to pass on wealth because they sat outside your estate for IHT purposes.

From 6 April 2027, most unused pension funds and death benefits will be brought into your taxable estate. This means your pension pot will be added to your property and savings when calculating your total IHT bill. For many families, this change could push them over the tax-free thresholds for the first time.

IHT thresholds and rates

While the rules for businesses and pensions are changing, the core thresholds for most individuals remain frozen until April 2031.

• Nil-rate band – £325,000 – the standard tax-free amount for everyone
• Residence nil-rate band – £175,000 – extra allowance if you leave your main home to direct descendants.
• Combined couple’s limit – £1 million – total possible tax-free limit for a married couple/civil partners.

Bear in mind, the residents nil-rate band starts to taper away if your total estate is worth more than £2 million. For every £2 over this limit, you lose £1 of the allowance.

Mitigating an IHT bill

Despite the tightening rules, there are still several ways to legally reduce a potential IHT liability:

• The 7-Year Rule: Most gifts made to individuals (Potentially Exempt Transfers) fall out of your estate entirely if you live for seven years after making the gift. If you die between years 3 and 7, taper relief may reduce the tax rate on those gifts.
• Annual Exemptions: You can give away £3,000 per year tax-free. You can also carry forward one year’s unused allowance, allowing for a £6,000 gift in a single year.
• Small Gifts: You can give up to £250 per person to as many people as you like each year, provided they haven’t received part of your £3,000 annual exemption.
• Gifts from Surplus Income: If you can prove a gift is made from your regular surplus income and does not impact your standard of living, it is usually immediately exempt.
• Charitable Giving: Leaving at least 10% of your net estate to charity can reduce your overall IHT rate from 40% to 36%.

What should you do next?

The new rules for family businesses and farms are complex, but they don’t have to be overwhelming. Why not get in touch with our tax experts today for a review of your estate. We’ll help you understand exactly how the 2026/2027 changes may impact you and what plans you can put in place.