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Inheritance tax (IHT) is a tax that may be payable on the value of a person’s estate on death. Historically, IHT was primarily associated with the wealthiest estates. However, frozen tax thresholds, rising asset values and recent legislative changes have increased the number of estates that fall within the scope of IHT. This article considers some of the key factors driving that trend and steps families can take to plan effectively.
Frozen tax thresholds:
One of the key reasons more estates are falling within the scope of IHT is that key tax-free allowances have remained unchanged for many years.
Nil-rate band:
Every individual currently has a £325,000 nil-rate band. This is the amount that can generally pass free of IHT. However, the available nil-rate band may be reduced by certain gifts made within the seven years before death.
The nil-rate band has remained frozen at £325,000 since 2009/10. During that period, property values and other asset prices have increased significantly, resulting in more estates exceeding the available tax-free allowances and becoming subject to IHT.
In addition to this, any unused nil-rate band from a predeceased spouse’s or civil partner’s estate may be transferred to the survivor’s estate. This means that up to £650,000 of nil-rate band may be available on the death of a surviving spouse or civil partner, before taking into account any available residence nil-rate band.
Residence nil-rate band:
The residence nil-rate band (RNRB) was introduced in April 2017. Where a qualifying residence passes to direct descendants, an additional allowance of up to £175,000 may be available. Together with the nil-rate band, this can increase an individual’s available IHT allowances to £500,000, or up to £1 million for a married couple or civil partners where transferable allowances are available. However, the RNRB is subject to a number of conditions and may not be available in all circumstances.
Changes to Business and Agricultural Reliefs:
There have been significant changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) that came into force on 6 April 2026. Prior to that date, qualifying business and agricultural property could often benefit from 100% relief from IHT. Following reforms introduced on 6 April 2026, the amount of qualifying agricultural and business property that can attract 100% relief is subject to a £2.5 million cap. Assets above that threshold generally qualify for relief at 50%, meaning some farming and business-owning families may face IHT liabilities that would previously have been eliminated.
What can families do?
While IHT cannot always be avoided, early planning can help reduce unnecessary tax exposure. Steps to consider may include:
- Reviewing your Will and wider succession arrangements.
- Considering whether lifetime gifts may be appropriate.
- Reviewing the IHT position of any business or agricultural assets.
- Seeking specialist advice well before any anticipated succession event.
Conclusion
Looking ahead, IHT is likely to become relevant to even more families. From 6 April 2027, most unused pension funds and death benefits are due to be brought within the scope of IHT. Combined with frozen tax thresholds and recent restrictions to business and agricultural reliefs, this is likely to increase the number of estates with an IHT liability. As a result, regular estate planning reviews are becoming increasingly important.
Please contact a member of the Tax, Trusts and Succession team if you would like further advice on the above.