Major reforms to inheritance tax (IHT) are set to take effect

Major reforms to inheritance tax (IHT) are set to take effect in April 2026 and April 2027, with significant implications for business owners and investors. The government’s changes to Business Relief (BR) (formally known as Business Property Relief) could largely increase the taxable value of many estates. With IHT charged at 40%, the stakes are high.

This article explores what’s changing and why it matters for you.

APRIL 2026

What’s changing with Business Relief?

Currently, Business Relief allows shares in trading companies or trading groups to be passed on free of IHT. Broadly, in practice, this means:

• If someone owns shares in a trading company (or a qualifying trading group) worth £10 million, the full £10 million is exempt from IHT.
• The value is treated as being outside of their estate when they die.

 

From April 2026, however, the rules will change:

• Only the first £1 million of value will qualify for the BR exemption.
• Any value above £1 million will still qualify for BR, but at a reduced rate of 50%. The remaining 50% will fall into the estate and potentially face a 40% IHT charge.
• There is currently no ability to transfer the £1m allowance onto a spouse or civil partner.

 

This means that from April 2026, 50% of £9m of a £10m business could be taxable, creating an IHT liability of £1.8m on death.

This represents a significant shift in how business wealth is taxed, highlighting the need for proactive planning before April 2026 for business owners.

 

How These Changes Apply to Agricultural Relief

Agricultural Relief works similarly to Business Relief, providing up to 100% exemption from IHT for qualifying agricultural property. However, like Business Relief, Agricultural Relief will also be affected by the tightening of rules in the same way.

Agricultural relief is primarily available in two scenarios;

• To a farmer who owns the land and buildings and uses them in their own business; and
• To a landowner who is letting out agricultural land or buildings to a farmer.

APR already requires strict eligibility conditions, so landowners and farmers should review whether their property qualifies under current rules and explore succession strategies before any changes are implemented.

 

APRIL 2027

 

Pensions and IHT

Pensions have long been a valuable tool in succession planning because, under current rules, unspent defined contribution pension pots were outside of the estate for IHT purposes. This means they can pass to beneficiaries without facing inheritance tax.

 

Current Rules

In defined contribution schemes, any unused scheme funds can normally be passed on and paid out to beneficiaries in the form of death benefits.

In defined benefit schemes, there is no dedicated fund that can be inherited, but there may be specific death benefits which become payable, such as a lump sum death benefit or a set amount of pension to a dependant.

Generally, if the pension holder dies before age 75, beneficiaries can usually take the remaining pension funds tax-free.

If death occurs after age 75, benefits are not subject to IHT, but they are taxed at the beneficiary’s marginal income tax rate when withdrawn.

 

Upcoming Changes

The government has announced significant reforms that will impact pensions and inheritance tax:

• From 6 April 2027, most unused pension funds and death benefits will be included within the value of the estate for IHT purposes.
• This means they could be subject to a 40% IHT charge. For those who pass after age 75%, this would apply then before any income tax is applied, creating a potential double taxation issue.

For example, if a pension holder dies after age 75 with £100,000 in their pension pot, and the beneficiary is an additional rate taxpayer, the effective tax rate could be as high as 67%, with only £33,000 remaining for the beneficiary.

These changes mean pensions will no longer be a guaranteed IHT-free inheritance, and they are likely to become a core part of estate planning discussions going forward.

It is driving individuals to now reconsider their retirement plans, particularly concerning how they fund their lifestyle. This was one of the aims of the government’s decision – to ensure pension pots are being used for their intended purpose: to provide for retirement, rather than being used primarily as tools for passing on tax-free wealth.

 

What other changes are on the horizon?

The Autumn Budget 2025 is attracting significant attention, with Chancellor Rachel Reeves expected to make large changes amid speculation of substantial tax increases under the Labour government. While inheritance tax (IHT) was a major focus of the previous budget, this year’s budget is likely to prioritise other taxes. Nevertheless, some IHT reforms may still be introduced. Analysts have identified several potential areas of focus:

• The freeze on tax-free allowances (nil-rate bands) was previously extended until 2030, which continues to expose estates to the effects of fiscal drag. It’s possible this freeze could be extended further.
• Under current rules, individuals can make lifetime gifts free of IHT provided they survive for seven years after the gift. There is currently no limit on the value of these gifts if this timeframe is met.

 

There is discussion within the government about tightening these gifting rules, which could potentially include a lifetime cap on amounts that can be gifted before death.

• Taper relief currently reduces the rate of IHT applied to gifts if the donor dies between three and seven years after making the gift. There is the potential for them to reconsider this relief.

 

Given the pace of potential reforms, individuals should review estate planning strategies now rather than wait for the Autumn Budget.

Here at ETC Tax, we understand that these upcoming inheritance tax reforms will affect individuals in different ways depending on their circumstances. We can discuss your specific situation, explain how these changes might impact you, and help identify strategies to protect your wealth and achieve your estate planning goals. Do not hesitate to get in touch today if you would like to discuss your affairs.