Imminent inheritance tax reform takes shape: Are you prepared?
The government’s long-anticipated overhaul of the UK inheritance tax (IHT) regime has taken a major step forward. Following months of speculation since the initial announcement in the Autumn Budget 2024, draft legislation was published on 21 July 2025 (Legislation Day) outlining the proposed changes in detail.
While the reforms will not take effect until 6 April 2026, they are expected to have far-reaching consequences for many individuals and families. In most cases, IHT liabilities are expected to rise, making early planning essential for business owners, farmers and individuals with pension savings.
Key areas of change
Below are some of the most significant developments emerging from the draft legislation:
Inheritance tax relief caps
The legislation introduces new caps on certain IHT reliefs, which have historically provided substantial tax mitigation opportunities, particularly for business owners and those holding agricultural property.
- From 6 April 2026, the combined value of Business Property Relief (BPR) and Agricultural Property Relief (APR) available at 100% relief will be capped at £1 million per individual.
- Qualifying transfers above £1 million will receive only 50% relief.
- The £1 million allowance is not transferable between spouses.
- The £1 million allowance will refresh every seven years, similar to existing gift exemption rules.
This represents a major shift from the current regime and may materially affect longstanding planning strategies for family businesses and farming estates.
Many of our clients are exploring the use of trusts to transfer wealth while maintaining control and safeguarding assets across generations. For those considering this approach, there is a limited window of opportunity to place qualifying assets into trusts before 6 April 2026, under the current rules. This is ahead of the introduction of the £1 million allowance on trust entries for qualifying assets above any available nil rate band.
However, it is equally important to factor in the ongoing tax implications associated with trusts. These require careful modelling and long-term planning, as the upcoming restrictions on relief will impact all 10-year and exit charge calculations from 6 April 2026 onward.
Transitional provisions
As mentioned above, it’s crucial to assess the potential impact of these changes as early as possible. Any planning must take into account that the legislation includes transitional provisions specifically designed to prevent individuals from exploiting the gap between the proposal announcement and the implementation of the new rules.
These provisions are complicated, and advice will be critical to optimise any remaining reliefs or planning advantages. In summary:
- The transitional rules apply to gifts (to individuals and trusts) where the donor dies on or after 6 April 2026; and
- The gift occurred on or after 30 October 2024, and
- Death occurs within seven years of the gift.
Reduced relief for Alternative Investment Market (AIM) shares
Historically, AIM-listed shares qualified for 100% BPR after two years of ownership, making them a valuable tool for IHT planning. Under the new proposals, the rate of BPR on shares traded on a recognised stock exchange which is not listed (such as AIM) will be reduced from 100% to 50%.
This change may prompt a reassessment of the role of AIM investments in estate planning strategies, particularly for investors approaching the two-year ownership threshold.
Unused pension funds
In a significant alteration to the pension landscape, it has been confirmed that, from 6 April 2027, unused pensions in most cases will now be subject to IHT. However, in a slight revision, lump sum death in service benefits will not be brought into scope. The only other change that has been alluded to, but not yet confirmed, is that personal representatives - rather than pension scheme administrators - will be liable for reporting and paying IHT.
Historically favoured for their IHT efficiency, especially when left untouched, pension funds may now create an unexpected tax burden for beneficiaries, particularly where death occurs after age 75.
While death-in-service lump sums remain excluded, the broader change demands a reassessment of retirement and legacy strategies. Individuals may benefit from using pension withdrawals more actively during their lifetime, leveraging surplus income exemptions, or redirecting funds into more tax-efficient vehicles such as ISAs or intergenerational pension contributions. Careful consolidation of pension arrangements may also help streamline future planning. While preserving retirement security remains paramount, early and tailored action can help mitigate the long-term impact of these changes on family wealth.
Immediate actions to consider
- Review your will now - especially if you’re a business owner - to ensure the £1 million relief isn’t inadvertently lost on first death.
- Explore the use of trusts before the 6 April 2026 deadline, but only after carefully weighing the associated costs and implications.
- Assess whether your assets qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR). These reliefs remain valuable.
- For those in the rural sector, it’s essential to have clarity on land ownership and operational structures.
- Contact a specialist adviser before October 2025 to allow time to assess your options and implement any planning well in advance of the new regime.
We’re here to help
These changes represent a significant shift in the UK inheritance tax landscape. While there is still time before they come into effect, taking early action could make a meaningful difference. Whether you already have trust structures in place, hold business assets, or are planning to pass on wealth to future generations, now is the time to evaluate the potential impact and consider your options. Having a clear plan in place can help ease much of the uncertainty surrounding this sensitive area.
Our private client and wealth management specialists are here to support you, offering tailored advice to help develop a strategy aligned with your personal and financial objectives.
Please get in touch with your usual Azets adviser or a member of our specialist team via the form below.
