Inheritance Tax (IHT) has long been a vital aspect of estate planning, impacting how wealth is transferred across generations. With significant changes scheduled from April 2025, individuals must understand the current rules, be aware of what's changing, and take proactive steps to minimise future IHT liabilities.

The current IHT system

As of now (April 2025), IHT is levied at 40% on estates exceeding the nil-rate band of £325,000. An additional residence nil-rate band of £175,000 may apply when passing on a primary residence to direct descendants, i.e. your children or grandchildren, potentially increasing the tax-free threshold to £500,000 for individuals or £1 million for married couples and civil partners.

Certain reliefs, such as Agricultural Property Relief (APR) and Business Property Relief (BPR), allow qualifying assets to be passed on free from IHT, facilitating the transfer of family farms and businesses without substantial tax burdens.

IHT changes starting from April 2025

The Autumn Budget of October 2024 introduced pivotal reforms to IHT, set to take effect from April 2025. These are:

From April 2025:

  • Transition to a residence-based system: The UK will move from a domicile-based to a residence-based system for IHT. Individuals who have been UK residents for a minimum of 10 out of the previous 20 tax years will have their UK and non-UK assets subject to IHT. Individuals who leave the UK will remain within the scope of inheritance tax for a period ranging from three to 10 years after their departure.

From April 2026:

  • Agricultural Property Relief (APR) and Business Property Relief (BPR) adjustments: A combined allowance of £1 million will be introduced for APR and BPR. Qualifying property within this threshold will continue to benefit from 100% relief. However, assets exceeding this allowance, including shares that are 'not listed' on markets, such as AIM, will reduce the relief rate to 50%.

From April 2027:

  • Inheritance tax on pension assets: Currently, unused pension funds can be passed on free of IHT. From April 2027, the government plans to include most unused pension savings and death benefits within the scope of an individual's estate for IHT purposes.

Proactive steps before April 2026

To mitigate the impact of these forthcoming changes, individuals should consider the following strategies:

  1. Review and restructure asset holdings: Evaluate your current asset portfolio, especially business and agricultural properties. If the combined value exceeds £1 million, consider restructuring ownership or transferring portions to heirs before the new rules take effect to maximise the benefit of existing reliefs.
  2. Use current pension benefits: Given the impending inclusion of pension assets in IHT calculations, assess the benefits of drawing down pension funds or reassigning pension nominations to ensure tax efficiency.
  3. Consider lifetime gifting: Use the annual gift allowance of £3,000 and other exemptions to transfer wealth to beneficiaries during your lifetime.
  4. Create trusts: Setting up trusts can be an effective way to protect assets for future generations. Trusts can help reduce IHT liabilities, though they have complex rules and may have potential charges.
  5. Update estate planning documents: Create a Will or review and update your current Will to reflect your wishes and ensure it is structured to be tax efficient in light of the upcoming IHT changes.

Tax-efficient strategies to reduce IHT

Beyond the immediate steps, consider these long-term strategies:

  • Charitable donations: Leaving at least 10% of your estate to charitable organisations can reduce the IHT rate from 40% to 36% on the remaining estate.
  • Life insurance policies: A life insurance policy written into a trust can provide funds to cover IHT liabilities, ensuring your beneficiaries receive their inheritance without selling assets to pay the tax.

The 7-year rule and PETs

 As is the case with most tax planning opportunities, time is of the essence. The sooner measures can be taken to mitigate future IHT bills, the better, particularly as the '7-Year Rule' or Potentially Exempt Transfers (PETs) still apply.

This rule allows you to make 'gifts' of assets (a PET) from your estate to your beneficiaries. If you live for at least 7 years after creating the PET, your estate will not have to pay IHT on that asset.

Conclusion

The impending changes to the inheritance tax rule necessitate proactive planning to safeguard your estate and minimise tax liabilities. By understanding the current rules, anticipating future modifications, and implementing strategic measures before April 2026, you can ensure that your estate is transferred to your beneficiaries in the most tax-efficient manner. Consulting with financial and legal professionals will provide tailored advice to navigate these complexities effectively.

How can DWilkinson&Company help?

The rules surrounding IHT are complex, particularly as they are set to change and place more restrictions on taxpayers. At DWilkinson&Company, we can explain the new IHT rules and how they will impact you and your family's circumstances. We can also recommend what tax planning steps you can take now to ensure the minimal amount of IHT has to be paid in the future.

Our estate planning and trust service can help you take advantage of the tax opportunities that are still available so that your family does not face hefty tax bills in the future.

Please contact us at 0113 320 0001 or email office@dwco.co.uk to learn more.