Inheritance Tax
Keeping It In The Family
Let’s face it—talking about death and taxes isn’t anyone’s idea of a good time. But if you care about what happens to your hard-earned assets after you're gone, it's a conversation worth having. Especially now, with the UK’s inheritance tax (IHT) landscape undergoing some significant changes.
What Is Inheritance Tax, Anyway?
Inheritance Tax is the levy the UK government imposes on the estate (property, money, and possessions) of someone who has died. As of 2025, the standard IHT rate remains at 40% on the portion of your estate that exceeds the £325,000 threshold. However, with the residence nil-rate band, this threshold can increase to £500,000 if you leave your home to your children or grandchildren.
But don't get too comfortable—recent policy shifts mean it's time to revisit your estate planning.
Key Changes in 2025: What You Need to Know
1. From Domicile to Residency-Based Taxation
Previously, IHT was determined by your domicile status—a somewhat nebulous concept based on where you consider your permanent home. Starting from 6 April 2025, the rules are shifting to a residency-based system. Here's how it works:
If you've been a UK resident for at least 10 years, your worldwide assets will be subject to IHT.
If you leave the UK, you'll remain within the IHT net for 10 years after your departure.
This change aims to close loopholes that allowed long-term residents to avoid IHT by claiming non-domiciled status.
2. Agricultural and Business Property Relief Adjustments
For years, Agricultural Property Relief (APR) and Business Property Relief (BPR) have provided significant IHT exemptions. However, from April 2026, the rules are tightening:
The first £1 million of qualifying agricultural or business assets will remain exempt.
Assets exceeding this threshold will receive only 50% relief, effectively subjecting them to a 20% IHT rate.
This move has sparked protests among farmers and business owners, who argue it threatens the viability of family-run enterprises.
3. Inherited Pensions Now in the IHT Net
Starting April 2027, inherited pensions will be included in the IHT calculation. This means that pension pots passed on to beneficiaries could be taxed, altering the landscape of retirement and estate planning.
Strategies to Mitigate Inheritance Tax
While these changes may seem daunting, there are proactive steps you can take to manage your IHT liability:
1. Gifting Assets During Your Lifetime
You can gift assets to loved ones during your lifetime. If you survive for seven years after making the gift, it typically falls outside your estate for IHT purposes. Just be mindful of the Potentially Exempt Transfer (PET) rules.
2. Utilize Trusts Wisely
Trusts can be an effective tool for managing how your assets are distributed and taxed. However, with the new residency rules, the benefits of offshore trusts are diminishing. It's crucial to seek professional advice to navigate this complex area.
3. Life Insurance Policies
A life insurance policy written in trust can provide a lump sum to cover potential IHT liabilities, ensuring your beneficiaries aren't forced to sell assets to pay the tax bill.
4. Regularly Review Your Estate Plan
Given the evolving tax landscape, it's essential to review your estate plan regularly. Changes in legislation, asset values, and personal circumstances can all impact your IHT exposure.
Final Thoughts: Plan Now to Protect Your Legacy
Inheritance Tax may not be the most cheerful topic, but with thoughtful planning, you can ensure that more of your estate goes to your loved ones and less to the taxman. The 2024-2025 changes introduced by the government underscore the importance of staying informed and proactive.
Remember, it's not just about preserving wealth—it's about providing peace of mind for you and your family. So, take the time to review your estate plan, consult with professionals, and make the necessary adjustments to safeguard your legacy.