Changes to IHT

Inheritance tax (IHT) is already a complex topic, and with several significant changes coming between April 2025 and 2030, understanding how they could impact you and your loved ones is crucial. These new rules will bring more estates into the IHT net, meaning careful planning is more important than ever.

In this blog, we break down the key changes, what they mean for households, and how you can prepare.

What Are the Key Changes Between 2025-2030?

Between April 2025 and 2030, four major updates to IHT will take effect:

• April 2025: Non-domiciled (non-dom) status ends, with a new residency-based taxation system introduced.

• April 2026: Farms and businesses worth over £1 million will face IHT for the first time.

• April 2027: Pensions will become subject to IHT for the first time.

• April 2028-30: IHT thresholds remain frozen, pulling more estates into taxation due to rising asset values.

With each change bringing different consequences, let’s break them down further...

April 2025: The End of Non-Dom Status

This change primarily affects individuals with foreign assets who have lived abroad for several years or have recently moved to the UK. The key updates include:

• Taxation will be based on residency rather than domicile status.

• A new Long-Term Resident (LTR) rule will apply to those who have lived in the UK for 10 of the last 20 years.

• Offshore trusts will now be subject to periodic 10-year and exit IHT charges.

• Those leaving the UK will still be taxed on worldwide assets for up to 10 years, depending on the duration of their UK residence.

An estimated 9,300 individuals per year will be affected, and professional tax advice is strongly recommended if you believe that this change could impact upon you.

April 2026: IHT Introduced for Farms & Businesses Over £1M

Families inheriting agricultural or business assets worth over £1 million will now face inheritance tax. Key points include:

• The first £1 million in assets remains IHT-free.

• An additional £325,000 may also be exempt under the standard IHT allowance.

• Assets exceeding this threshold will now face a 50% IHT charge, reducing the effective tax rate to 20% (rather than 40%).

• Married farmers can still pass assets tax-free to their spouse or main residence to children, potentially increasing their tax-free amount to £3 million.

While the government estimates only 500 farms per year will be affected, the NFU suggests up to 70,000 farms could feel the impact. Seeking financial advice is recommended to explore exemptions.

April 2027: Pensions Become Taxable Under IHT

This is one of the most significant changes, likely affecting 10,500 estates per year and increasing tax bills for 38,500 estates. The new rule means:

• Defined contribution pensions will now be subject to IHT at 40%.

• Pensions will be included in estate calculations, potentially pushing estates over the IHT threshold.

• Many individuals may need to spend pension income first or gift assets earlier to reduce tax liability.

If you have a pension, it’s essential to review your estate plan and explore options such as gifting or trust planning.

April 2028-30: IHT Thresholds Remain Frozen

While no direct changes are being made, keeping IHT thresholds frozen means more people will be caught in the IHT net due to rising property and asset values:

• The Nil-Rate Band (NRB) remains at £325,000, unchanged since 2009.

• The Residence Nil-Rate Band (RNRB) stays at £175,000.

• As property prices rise, an estimated 10% of estates will be subject to IHT by 2030.

Gifting assets during your lifetime can help reduce your IHT liability, but it’s important to understand the seven-year gifting rule to avoid unexpected tax bills.

Planning Ahead

With these changes coming, it’s more important than ever to plan ahead. Some key strategies include:

• Seeking professional tax advice to understand how these rules impact your estate.

• Using annual gifting allowances—you can gift £3,000 per year tax-free.

• Spending pension income first, as pensions will soon be taxable under IHT.

• Considering trusts or other tax-efficient structures for asset protection.

Need help navigating these changes? The upcoming IHT changes will affect thousands of people, and early preparation is key to minimising tax liability. If you need guidance on how these changes impact you, The Tax Faculty is here to help.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

Contact Us

Contact us today on freephone 0800 0016 878 for a free consultation on all tax issues, or fill out the handy form below and we'll get back to you as soon as possible.

Alternatively, you can email us at info@thetaxfaculty.co.uk or complete the form below.

(Please note, non-UK callers may need to call 0207 101 3845 if your line cannot connect to our 0800 number)

Feel free to contact us through WhatsApp - we accept calls and messages.

Simply click the WhatsApp button below: