Inheritance tax (IHT) is a crucial consideration in estate planning, with far-reaching financial implications for families and loved ones. With a top rate of 40% on estates above certain thresholds, IHT can place a significant financial strain on heirs.

Understanding the intricacies of Inheritance Tax is essential for effective planning, especially given recent updates to agricultural and business property reliefs in the UK Budget. In this inheritance tax guide, we’ll outline how IHT works, recent changes you should know about, and effective strategies for reducing your IHT liability.

What Is Inheritance Tax?

Inheritance tax is a tax on the estate of someone who has passed away, including all their assets such as property, money, and personal possessions. In the UK, the standard rate is 40%, applied to the part of an estate above the tax-free threshold, known as the nil-rate band.

Nil-Rate Band

Currently, the nil-rate band in the UK is set at £325,000, meaning if the total value of an estate is below £325,000, no IHT is due. However, if it exceeds this threshold, inheritance tax is charged at 40% on the remaining amount.

For example:

Estate value: £500,000
Nil-rate band: £325,000
Taxable amount: £175,000
IHT at 40%: £70,000

Additional Allowances

The residence nil-rate band (RNRB) allows for an additional tax-free allowance for homes passed on to direct descendants, such as children or grandchildren. As of 2024, the RNRB is set at £175,000. This allowance can be added to the standard nil-rate band, raising the threshold to £500,000 when a direct descendant inherits a family home.

Together, these allowances mean married couples and civil partners can potentially pass on up to £1 million tax-free if they leave their family home to their children or grandchildren.

The Budget 2024: Recent Changes in Inheritance Tax

With changes in the UK Budget impacting IHT, it’s essential to be aware of new limits and rules that may affect your estate planning.

Changes to Agricultural and Business Property Relief Following the Budget

Agricultural and business property reliefs have been valuable tools for reducing inheritance tax for those passing down farming businesses or family-owned companies. However, the recent Budget has introduced significant changes to inheritance tax (IHT) relief on agricultural and business property, set to take effect from 6 April 2026. Here’s what landowners and farmers need to know:

Agricultural Property Relief (APR)

The current 100% relief will be capped at the first £1 million of combined agricultural and business property. For amounts exceeding this threshold, inheritance tax will be charged at a reduced rate of 20% instead of the standard 40%.

This new tax rate can be paid in instalments over 10 years, interest-free, offering landowners greater financial flexibility. Landowners can still benefit from spousal exemptions and nil-rate bands, allowing a couple with farmland to potentially pass on up to £3 million without incurring inheritance tax although the APR £1 million allowance cannot be transferred between spouses. Remember to review ownership structures to ensure part of the allowance is not lost.

Under current rules, APR applies to assets used in agriculture for at least two years (if owner-operated) or seven years (if let out). This relief is intended to protect family farms from high IHT, covering the “agricultural value” of farmland and associated buildings but not assets like machinery, livestock, or non-farming properties.

Proposed reforms aim to prevent APR from being used in tax-saving schemes involving passive investments or properties not directly engaged in farming. Key changes include a stricter definition of “agricultural use,” disqualification for long-leased or passive properties, and more stringent requirements for farmhouses. Enhanced compliance checks may also be introduced to ensure eligibility.

These changes could significantly impact estate planning for landowners, potentially increasing IHT liabilities for non-active farms or properties. Landowners are encouraged to review their estate plans with tax professionals to navigate the evolving rules, ensuring their assets remain eligible for APR and safeguarding family farms across generations.

Business Property Relief (BPR)

Business Property Relief (BPR) is a valuable inheritance tax (IHT) relief that reduces the taxable value of certain business assets by 50% or 100%, depending on ownership type. The £1 million allowance is shared with any property entitled to APR. Currently, BPR applies to qualifying businesses or shares held for at least two years, allowing family businesses to transfer assets across generations without facing a prohibitive IHT burden. Qualifying assets include sole proprietorships, unlisted shares, and some partnership interests. Importantly, the business must be actively trading, as investment businesses (like property letting) generally don’t qualify.

Proposed changes to BPR aim to tighten eligibility and prevent its use for passive investment purposes. Under the new proposals, businesses deriving a substantial portion of their income from non-trading activities may see restricted or eliminated relief. The rules may also redefine what qualifies as “actively trading” to ensure only operational businesses gain relief, closing potential loopholes for assets primarily held as investments.

If BPR and APR eligible assets exceed £1 million then from 6 April 2026 the relief will be shared pro rata between the APR and BPR assets – until then APR assets have priority.

These reforms are expected to impact estate planning for business owners, particularly those with mixed-income activities or passive investments. Advisors recommend that business owners review their estate plans in light of the anticipated changes to safeguard qualifying assets and reduce potential tax liabilities.

Taper Relief

Current Rules for Taper Relief

Taper Relief provides a way to reduce the rate of Inheritance Tax (IHT) on lifetime gifts if the donor survives at least three years after making the gift. Under current rules, gifts made within seven years of death may be subject to IHT, but only if the total value of the gift exceeds the Nil Rate Band (NRB).

The relief reduces the rate of tax due, not the taxable value of the gift. This means if a gift is below the NRB, there is no taper benefit because no tax would have been payable regardless. However, for gifts exceeding the NRB where tax is due, the rate of IHT tapers over time:

3–4 years after the gift: Tax is reduced by 20%.
4–5 years: Tax is reduced by 40%.
5–6 years: Tax is reduced by 60%.
6–7 years: Tax is reduced by 80%.
7 years or more: No IHT is due on the gift.

Proposed Reforms to Taper Relief

The government is reviewing changes to simplify IHT and address disparities in the system. A key proposal under consideration is reducing the taper period from seven years to five years. This means:

Gifts made more than five years before death would be entirely exempt from IHT.
Gifts made within five years of death could still be taxed, with the rate tapering as outlined above.

What This Means for Estate Planning

If implemented, the proposed reforms could streamline estate planning and provide greater certainty for donors and beneficiaries. Reducing the taper period would encourage earlier lifetime giving, allowing individuals to pass on wealth more tax-efficiently. However, high-value gifts made closer to the time of death would remain subject to tax at reduced rates, ensuring fairness in capturing recent transfers of wealth.

These changes are expected to take effect in 2026, pending final approval. Landowners and individuals planning significant gifts should consult with tax professionals to adapt their estate strategies to the evolving rules, maximizing tax efficiency while safeguarding family wealth.

Timeline for Upcoming Changes to Inheritance Tax

Understanding when inheritance tax (IHT) changes are implemented is crucial for effective estate planning. Some recent updates to IHT allowances and reliefs are already in effect, while others are scheduled to come into play in the near future. Let’s take a look at the timeline for these changes and what they mean for those planning their estates.

Immediate Changes to Agricultural and Business Property Reliefs

The UK government recently introduced stricter limits on Agricultural Property Relief (APR) and Business Property Relief (BPR). These reliefs, which have allowed certain agricultural and business assets to qualify for reduced or zero inheritance tax, are being adjusted to reduce potential misuse and to narrow eligibility:

Changes effective immediately: As of the latest budget update, only assets actively used in the farming business can qualify for APR. This excludes certain leased or passive investments that previously might have qualified. Similarly, BPR now requires businesses to be “wholly or mainly” engaged in trading activities, disqualifying those with a significant passive investment element.

Upcoming Threshold Adjustments for IHT Allowances

While the nil-rate band and residence nil-rate band have remained static for several years, the government is reviewing these thresholds and may increase them in the coming years to reflect inflation and rising property values. The adjustments are expected to roll out gradually, helping estates that would otherwise be dragged into the IHT net due to property inflation.

Planned increase timeline: Expected in 2025–2026, these adjustments could raise both the general nil-rate band and the residence nil-rate band, providing a higher tax-free threshold. If confirmed, the changes could ease the IHT burden for estates that have grown in value primarily due to real estate inflation.

Potential Changes in Tax Rates

There is ongoing debate about inheritance tax rates, with some proposals suggesting a reduction in the top rate from 40% to 36%, while others advocate for a lower flat rate but without allowances that might simplify the tax. However, no specific date has been announced for potential changes to the IHT rate itself. These discussions may become clearer over the next few budget cycles, particularly as the government addresses tax reform more broadly.

What This Means for You

If you’re planning your estate, it’s essential to stay informed about these changes and to consult with a solicitor as needed. Understanding the timeline of upcoming changes will allow you to take advantage of existing reliefs and plan for adjustments in allowances or rules that could affect your IHT liabilities.

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Planning Ahead — Minimising Your Inheritance Tax Liability

Strategic planning can help to minimise your IHT liability, ensuring more of your estate is passed to loved ones. Below are some effective methods:

1. Use of Annual Exemptions and Gifts

Each individual in the UK has an annual gift allowance of £3,000, which can be given to any person or persons without incurring IHT. Additionally:

Small gifts exemption: You may gift up to £250 per person each year, provided they haven’t received any other gifts from you.
Wedding or civil partnership gifts: Parents can give up to £5,000 to a child for a wedding, while grandparents can give £2,500.

2. Gifting to Charity

Donating to a registered UK charity can help reduce your inheritance tax (IHT). If you leave 10% or more of your estate to charity, the IHT rate may be reduced from 40% to 36%. However, calculating whether the 10% threshold has been met can be complex, with specific rules and considerations involved. It’s essential to seek professional advice to ensure the criteria are met and to maximise the benefits for your chosen causes while reducing the tax burden on your estate.

3. Setting up a Trust

Trusts can be an effective tool in estate planning, allowing you to pass assets outside your estate and manage inheritance tax. Some popular options include:

Discretionary Trusts: These are commonly used to hold assets outside the estate, reducing IHT.
18-25 trusts can be advantageous as they avoid any inheritance tax if a beneficiary dies under 18 but there is a small charge if the beneficiary inherits between 18 and 25 or at the end of the trust.
Bereaved Minor Trust (BMT): Can be used for minors, these allow beneficiaries to inherit assets directly once they reach 18 but often there are better alternatives.
IPDI trust Often the best way to provide for someone in a trust until they reach a particular age or for their whole of their life

Gifting Your Home

Passing on property is a complex area of inheritance tax planning, as property values often make up a large portion of estates. There are several ways to approach this:

Downsizing: Selling a larger property and gifting the proceeds can reduce your estate’s value. Alternatively, downsizing to a lower-value property and gifting the remaining equity can be an effective strategy.
Joint tenancy or tenancy in common: In a joint tenancy, the property automatically passes to the surviving owner. In a tenancy in common, each person owns a defined share, allowing them to leave their share to whomever they choose.

Dealing with Inheritance Tax on Property

The family home often represents the largest asset in an estate. Strategies to reduce IHT on property include:

Equity release schemes: Releasing equity from your home can reduce its value, lowering your estate’s IHT burden. However, this option requires careful consideration, as it involves costs and reduces the amount left to beneficiaries.
Utilising the residence nil-rate band: If you plan to pass your family home to direct descendants, the RNRB can offer additional tax-free allowances.

Inheritance Tax and Pensions

Pension pots are not typically included in the taxable estate, meaning they can be a tax-efficient way to pass wealth to beneficiaries. Defined benefit pensions, for instance, can offer protection from IHT, while defined contribution pensions allow you to nominate beneficiaries who may receive tax-free benefits if you pass away before 75.

Common Mistakes to Avoid in Inheritance Tax Planning

1. Not Writing a Will

A well-written Will is essential in estate planning, ensuring assets are distributed according to your wishes and reducing legal complications. Dying without a Will, known as intestacy, can lead to unexpected tax implications and your assets not passing as you wish them to.

2. Ignoring the Seven-Year Rule

Gifts made more than seven years before death are exempt from IHT, while those within this period are potentially liable. Understanding this rule can help maximise the effectiveness of lifetime gifts.

3. Failing to Plan for Non-cash Assets

High-value assets such as properties, jewellery, art collections, and antiques often lead to substantial IHT bills if not planned for. Proper valuation and professional advice can help mitigate IHT on these assets.

4. Being caught out by the gift with reservation of benefit of rules

If you gift something but retain a benefit, such as use of the asset or income from it, that can mean the entire value of the asset is brought back into account in your estate for Inheritance tax, even though you do not own the asset.

Working with a Solicitor

Inheritance Tax (IHT) can be complex and challenging to navigate. It’s important to seek professional advice before taking action or deciding not to act, as your circumstances may involve unique factors that could lead to a different outcome. For effective IHT planning, many individuals rely on solicitors who specialise in inheritance tax and estate planning to provide tailored guidance and support. An IHT solicitor can help:

Identify exemptions: Maximising the use of all available exemptions, reliefs, and allowances.
Plan effective gifting strategies: Guiding on the timing and nature of gifts to reduce tax liability.
Establish trusts: Advising on suitable trust structures and managing them in compliance with current laws.

Working with an inheritance tax solicitor provides peace of mind that your estate will be managed efficiently and beneficiaries will benefit from an optimised tax outcome.

Inheritance tax planning is essential for preserving wealth and ensuring your estate can be passed on with minimal tax implications. From understanding allowances and exemptions to considering trusts and gifting strategies, effective IHT planning requires a well-rounded approach. Given recent changes in agricultural and business property reliefs, now is the time to reassess your estate and consider seeking advice from qualified inheritance tax solicitors.

By addressing IHT proactively, you can protect your assets, safeguard your loved ones’ inheritance, and reduce the financial burden inheritance tax can impose. Whether you’re planning for property, pensions, or family-owned businesses, thorough IHT planning can make a lasting difference to your legacy.

Our Brighton solicitors can guide you through the complexities of Inheritance Tax planning to help protect your estate and reduce potential tax liabilities. Contact our team today on 01273 604 123 or via email at enquire@bbc-law.co.uk. You can also make an enquiry here.

Inheritance Tax (IHT): What You Need to Know