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The last two Budgets have reshaped inheritance tax planning for many families. Some changes are already in force. Others arrive in April 2027. This article sets out the main points and the steps worth considering now.
The nil rate band stays frozen until 2031
The £325,000 nil rate band has not moved since April 2009. It will now remain at that level until 5 April 2031. The £175,000 residence nil rate band for the family home is frozen for the same period.
With house prices and investment values rising over that time, more estates are being drawn into the 40% charge. This makes the reliefs and exemptions below more important, not less.
Farms and family businesses: the new £2.5 million cap
From 6 April 2026, 100% agricultural property relief and business property relief are capped at a combined £2.5 million per person. Above that figure, relief drops to 50%. In effect, the excess is taxed at 20%.
Two points soften the impact:
- Any unused cap can pass to a surviving spouse or civil partner, giving a couple up to £5 million.
- Inheritance tax on qualifying assets can be paid in ten annual instalments, interest free.
Relief on qualifying AIM shares has also been reduced to 50% from the same date. AIM holdings do not use up the £2.5 million cap.
What to review: how the farm or business is owned between spouses, whether wills make use of both caps, and whether lifetime gifts or trusts now have a role. These are long-term decisions and benefit from early discussion.
Pensions will fall within the estate from April 2027
Unused pension funds have generally sat outside inheritance tax. From 6 April 2027, that changes. A pension pot left on death may be subject to 40% inheritance tax.
Pensions remain a valuable tax shelter during your lifetime:
- Contributions attract income tax relief at your marginal rate, up to the £60,000 annual allowance.
- Unused allowance from the previous three tax years may be available.
- Growth inside the pension is tax free.
- Up to 25% of the fund, capped at £268,275, can be taken tax free.
What to review: whether it still makes sense to leave the pension untouched as an inheritance vehicle. For some clients, drawing on the pension gradually and passing on other assets will now be more efficient. Spreading withdrawals over several years also keeps income tax down.
The annual exemptions still add up
Small, regular steps reduce the estate over time:
- £3,000 annual exemption. Unused allowance from last year can be carried forward once, so up to £6,000 may be available this year.
- £250 small gifts to any number of individuals, separate from the annual exemption.
- Regular gifts out of surplus income. These can be exempt if they form a settled pattern, so it is worth keeping the habit going and keeping records.
- Cash gifts to adult children are free of capital gains tax and fall outside the estate after seven years.
ISAs and married couples
The £20,000 ISA allowance is frozen until April 2031. From 6 April 2027, the cash ISA limit falls to £12,000 for those under 65. A surviving spouse can inherit ISA savings and keep them in an ISA wrapper through an additional allowance.
Before 5 April 2027: a short checklist
- Check whether the £2.5 million cap affects your farm or business, and how ownership is split between spouses.
- Review your will in light of the new caps and the pension change.
- Decide whether your pension should still be the last asset you touch.
- Use this year’s £3,000 exemption, and last year’s if unused.
- Make full use of ISA allowances while the cash limit remains £20,000.
- Keep a record of regular gifts out of income.
How we can help
Inheritance tax planning works best when it is reviewed regularly, not once. If you would like to talk through your estate, your pension or your business succession plans, please contact us. We offer free initial consultation.
This article is general guidance only and does not constitute tax, legal or financial advice. Rates and thresholds reflect legislation and announcements as at September 2026 and may change.
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