Nine months ago Rachel Reeves delivered her first budget and announced significant reforms to Inheritance Tax (IHT) legislation – to limit the scope of Agricultural and Business Property Relief and to bring unused pensions into the IHT regime.
Since then, the proposals have been consulted on, and draft legislation of the Finance Act 2025/2026 was published on July 21.
While unfortunately we have not seen the U-turn many had hoped for and there is little change to the reforms since Ms Reeves’s 2024 Autumn Budget speech, it brings clarity for those who will be impacted.
Our message remains not to panic. There are ways to manage future tax liabilities, and now that we have the details of the legislation, businesses and individuals can start putting plans in place to minimise the effects.
Inheritance Tax on unused pensions
In simple terms, under current legislation, the pension fund (defined contribution/SIPP etc) of an individual who passes away is out of scope for IHT.
But with effect from April 2027, that will change, with the value of any remaining pension fund and death benefits becoming liable to IHT. However, most death-in-service benefits, provided by an employer, will remain out of the scope of Inheritance Tax.
The draft legislation also states that personal representatives, rather than pension scheme administrators as previously announced, will be liable for reporting and paying any IHT due on unused pension funds. This could place a greater burden on family members if they are an executor of your will.
HMRC says most estates will remain unaffected after April 6 2027, but estimates 10,500 estates will face an Inheritance Tax liability where previously they would not, and an additional 38,500 estates will face higher IHT bills, with the average increase estimated to be £34,000 when pension assets are included in the value of the estate. (Source: HMRC – Reforming Inheritance Tax – gov.uk)
If you are one of the 49,000 whose estate is expected to be liable to some or more Inheritance Tax, you will need to review your plans to manage this tax liability, but of course, everybody’s circumstances are different; you might be just over the threshold where IHT will become payable or a long way over, both of which create different challenges.
Agricultural and business property relief
Like pensions, agricultural or business assets currently fall out of the scope of IHT (subject to qualifying criteria), which enables a farm or a business to be kept intact and passed free of Inheritance Tax to the next generation.
From April 2026, the scope of IHT reliefs will be limited. A new £1 million allowance will apply to the combined value of assets qualifying for 100% Agricultural Property Relief and Business Property Relief, and any value above that will receive 50% relief.
The draft legislation confirms that the £1 million limit is not transferable between spouses – meaning many may need to review their wills – and also applies to the combined value of assets in multiple trusts.
In a nutshell, if you have agricultural or business assets worth more than £1 million you will almost certainly leave a tax liability to your family, and if you built up even a modest pension fund, that too could result in an extra tax liability following your death.
How you arrange asset ownership to fit with your overall circumstances could still have the potential to reduce your Inheritance Tax liability.
If you would like to explore options available that may help manage future tax liabilities, the rules are now clear.
It is advisable to start taking the steps to review your estate plan and the value of assets you hold, as well as consider if trusts might be a viable option for you.
If you would like advice and support about how reforms to Inheritance Tax could impact you or your business, please get in touch.
