A New Era for UK Inheritance Tax – What’s Changing and How Rothstone Can Help

As the UK government grapples with a growing fiscal shortfall estimated to reach well over £40 billion Inheritance Tax (IHT) reforms are increasingly under the spotlight. With the Autumn Budget looming, now’s the time to understand what’s on the horizon and why proactive planning is more important than ever.

What’s Changing in IHT?

1. A Shift to Residence-Based Taxation (From 6 April 2025)

The long-standing “domicile” test is being replaced by a residence-based system. As of April 2025, individuals who have been UK residents for 10 out of the previous 20 tax years will be classified as “long-term residents,” meaning their worldwide assets not just UK ones are now within IHT scope.

This overhaul also touches trusts and lifetime gifts: non-UK assets transferred into trusts may now trigger IHT charges, depending on the settlor’s residence status. Lifetime gifting rules are similarly being tightened for long-term residents.

2. Caps on Agricultural and Business Property Relief (From April 2026)

Traditional reliefs that previously provided 100% IHT exemption on qualifying agricultural or business assets will be capped at £1 million per estate. Any excess will be taxed at 20%, which is half the standard IHT rate.

This change has sparked widespread concern among farming communities and family businesses. Indeed, protests began in November 2024, with the National Farmers’ Union calling for urgent discussions. Many warn this could imperil rural livelihoods and jeopardise jobs.

3. Pension Pots and Death Benefits No Longer Exempt (From April 2027)

Unused pension funds and death benefits were previously out of reach for IHT. But starting April 2027, these will be included in assessable estates, potentially making many more estates subject to IHT.

The reporting and payment responsibility lies with personal representatives (PRs) not pension administrators following consultation feedback. This adds complexity for families, especially executors needing to gather pension information rapidly to meet IHT deadlines.

4. Lifetime Gifting, Threshold Freezes, and Broader Tax Strategy

The “seven-year rule” for gifted assets is under reassessment, with possible caps and tapered relief tweaks to curb planning loopholes. Meanwhile, IHT thresholds (nil-rate band, residence nil-rate band) remain frozen further pushing more estates into taxable territory as inflation and property prices climb.

Beyond IHT, the government is exploring tweaks to capital gains, possible new property taxes, and alternatives to council tax but IHT is currently the “least worst” option they’re considering.

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Why It Matters and Why You Should Care

• Growing exposure: More estates especially those with property, pensions, or business/farming assets are likely to face IHT for the first time under these reforms.

• Admin complexity: Executors must now manage new processes for pensions and potentially deal with fragmented assets at a stressful time.

• Potential financial strain: Cohabiting couples, who lack spousal exemptions, may face hefty unexpected bills; one analysis points to possible IHT liabilities of over £80,000 for modest estates.

• Economic consequences: Family businesses and farms may need to restructure or sell assets to meet tax liabilities fueling economic ripple effects.

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How Rothstone Can Help You Navigate This Changing Terrain

1. Strategic Assessment & Early Planning

Let’s assess your current estate composition including property, business, pensions and trusts and model potential IHT exposure under upcoming rules. Early interventions like lifetime gifting, restructured ownership, or alternative vehicles can be far more effective than reacting post-event.

2. Specialist Advice on Nondomiciled or Long-Term Resident Status

For individuals with international ties, residency history, or trust structures, Rothstone can advise on how the new long-term resident test may apply, and explore options for minimizing surprise IHT liabilities.

3. Succession Planning for Farmers and Entrepreneurs

If you’re passing on farmland or business assets, we can help structure ownership changes ahead of the April 2026 cap, explore spousal election rules, or identify transitional reliefs all to preserve continuity for heirs and safeguard your legacy.

4. Pension & Executor Support

With pension pots entering the IHT net, Rothstone’s support becomes invaluable:

• We’ll guide PRs through the new duties.

• Help identify pension schemes, assess IHT liability, and explore efficient ways to coordinate with HMRC and administrators.

• Minimize emotional and procedural stress during probate.

5. Cohabitation Considerations

Cohabiting partners miss out on spousal allowances. We’ll help you explore formalising estates, setting up trusts, or strategic gifting to protect against unintentional IHT exposure.

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Bottom Line

UK inheritance tax law is undergoing seismic shifts sharpening on residence rules, stripping pensions of their tax-efficient status, and limiting reliefs once seen as rock solid. These changes raise challenges, but with the right planning, you can protect your wealth and your loved ones.

At Rothstone, we’re ready with actionable insights and tailored strategies to help you turn uncertainty into clarity, and safeguard what matters most.

Summary

• Inheritance Tax (IHT) is the tax your family may pay when you pass away, usually at 40% on estates over £325,000 (or £500,000 if leaving your home to children/grandchildren).

• More families will pay IHT because the tax-free limits are frozen until 2030, while property prices keep rising.

• From April 2025 – IHT will apply to anyone who’s lived in the UK for 10 out of 20 years, covering worldwide assets, not just UK ones.

• From April 2026 – Reliefs for farmland and family businesses will be capped at £1 million. Anything above this will be partly taxed.

• From April 2027 – Unused pensions and death benefits will be taxed as part of your estate (they used to be exempt).

• The government is also looking at tightening rules on gifting money/assets during your lifetime.

• These changes mean many families, farmers, and business owners could face unexpected tax bills.

• Planning ahead (using gifts, trusts, wills, or restructuring assets) can help reduce tax and protect loved ones.

• Rothstone Accountants can help by assessing your estate, explaining the new rules, and creating a tax-efficient plan tailored to you.