Last year, the much awaited first budget of the new Labour Government did not disappoint in bringing some dramatic changes.
Significant reforms were announced for inheritance tax. There will be a short period before these come into force but, in the meantime, here’s what you need to know.
The freeze on the thresholds below which no inheritance tax needs to be paid, known as nil rate bands, has been extended to April 2030. These nil rate bands stand at £325,000 for all individuals – which takes into account all asset types within the estate – and £175,000 for the residence nil rate band – which applies under certain conditions when passing a qualifying residence to direct descendants, if the estate is worth broadly £2m or less. As property prices continue to rise, this freeze has the effect of bringing more estates into the inheritance tax regime.
It had been suggested that Agricultural Property Relief (APR) and Business Property Relief (BPR) may be abolished completely, but the proposals have not gone that far. From April 2026, the rate of 100% relief will be restricted to the first £1m of combined APR and BPR assets, with any amount above this value being subject to relief at 50%. This means an effective rate of tax at 20% for those agricultural/business assets over £1m.
Shares not on a recognised stock exchange, such as those listed on AIM, currently benefit from 100% BPR and have become a popular inheritance tax saving investment tool. From April 2026, these shares will now only attract BPR at 50%.
The budget also proposed that any undrawn pension funds and death benefits will be included in a deceased’s estate for inheritance tax purposes from April 2027. These changes will affect many. For smaller estates, this could result in an inheritance tax charge where none was previously due. For larger estates, this could mean losing the residence nil rate band if pension funds take the total estate over £2m, as well as the additional tax charge on the pension funds themselves.
There are ways to mitigate the impact of these changes to inheritance tax through the use of wills and good lifetime estate planning.
If you have not reviewed your inheritance tax position or will for some time – we advise that now would be a good time to do this.
Tessa Bonser
Solicitor, Trusts & Estates
Stone King LLP
