Without some care and attention, Inheritance Tax (IHT) could take a big slice out of what you leave behind. However, the right planning could help you pass more wealth to your family.
Frozen IHT thresholds and incoming rule changes are forcing more families to rethink how their estates are structured and take proactive steps to protect their legacy.
Read on to find out how IHT could erode your estate and three key changes that may affect your family.
Inheritance Tax rates and thresholds
The standard rate of IHT is 40% (2026/27). This only applies to any portion of your estate that exceeds the nil-rate band threshold. In 2026/27, the nil-rate band is £325,000.
You also have a residence nil-rate band – up to £175,000. This applies to the value of your main residence, as long as you pass it on to your children or grandchildren on your death.
Combined, these thresholds allow you to pass up to £500,000 to beneficiaries tax-free.
If you’re married or in a civil partnership, the value of your estate on the death of either one of you will typically pass to the surviving partner with no IHT being payable. You can also generally use each other’s unused allowance in the future.
Working as a couple may mean you could leave up to £1 million (in the 2026/27 tax year) without paying IHT.
Your pension savings could soon be caught in the Inheritance Tax net
From 6 April 2027, unused pension funds and death benefits will be included in your estate when you die.
While benefits paid to a spouse or civil partner will still be exempt from IHT, if you leave your pension to another beneficiary and your estate exceeds the £325,000 nil-rate band, your pension savings may become subject to IHT.
Depending on how they access the funds, some beneficiaries receiving pension savings may also be subject to Income Tax.
Read more: Inheritance Tax on pensions: How incoming changes could affect your estate plan
If you’re concerned that your pension savings could be vulnerable to IHT, the sooner you act, the more time and choices you’ll have to protect your estate from an unwelcome IHT bill.
Inheritance Tax relief for business and agricultural assets is now capped
For years, qualifying business and agricultural assets could be passed on free of IHT through 100% Business Relief (BR) or Agricultural Relief (AR).
As of April 2026, only the first £2.5 million of qualifying assets will be exempt from IHT, while the excess will attract 50% relief.
This £2.5 million cap will be shared across assets qualifying for BR and AR on a pro-rata basis.
In effect, beneficiaries may be liable to pay 20% IHT on assets transferred above £2.5 million.
For spouses, any of the £2.5 million unused at death can be transferred to the surviving partner.
Importantly, the option to pay IHT by equal annual instalments over 10 years, interest-free, will continue to be available for qualifying agricultural and business property.
Reforms mean your entire global estate could be liable for Inheritance Tax
Historically, IHT was only levied on an individual’s estate when they were UK-domiciled.
However, the extent to which your worldwide estate is subject to IHT is now based on where you’ve been living in the years before your death.
If you’ve maintained close ties to the UK and been a tax resident in 10 out of the last 20 years, parts of your estate could be liable for UK IHT.
If you’re a tax resident elsewhere and don’t fall within the UK’s new residency-based rules, only your UK-based assets may be liable.
Whether you’re already enjoying life as an expat or considering moving abroad, you may benefit from restructuring your assets. Doing so could help you to optimise tax-efficiency and mitigate the eroding effects of IHT.
Read more: New residency rules mean you may be liable for Inheritance Tax. Here’s what you need to know
We’re here to help you leave a wonderful legacy for generations to come
Early estate planning allows you more time to take appropriate steps to help ensure your wealth passes to the next generation as tax-efficiently as possible and according to your wishes.
Here are just a few practical steps that could help you protect your legacy:
- Use your allowances – You can gift up to £3,000 per individual, each tax year. If unused, last year’s allowance can be carried forward, allowing up to £6,000 tax-free.
- Gift during your lifetime – Gifts made more than seven years before death are usually IHT-free under the “seven-year rule”.
- Gift using surplus income – Regular gifts from income that don’t affect your standard of living may be IHT-exempt.
- Set up trusts – Transferring assets into trust can remove them from your estate, reducing any IHT that may be payable. Different trusts suit different goals, so seek advice.
- Put your life insurance in trust – A policy written in trust pays out tax-free and could help cover IHT. Ensure it’s set up properly to ease, not complicate, the process.
Read more: Is your life insurance held in trust? Here’s why it matters
We’ll work with you to protect and transition your assets to future generations to help ensure more of your money goes to the people who matter.
Get in touch
Effective early planning could help you to reduce your IHT liability and ensure more of your wealth goes to your loved ones. If you’d like to discuss how you could protect your wealth from being eroded by IHT, please get in touch.
Email contactme@kbafinancial.com or call us on 01942 889 883.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.
Approved by The Openwork Partnership on 09/04/2026.