Inheritance Tax (IHT) remains one of the UK’s most debated and scrutinised taxes. With the UK government preparing significant changes to the inheritance tax rules in 2025, families across the country face increased uncertainty and potential financial impact. This article provides a comprehensive overview of the current IHT landscape in the UK, upcoming reforms, expert insights, and practical advice for estate and tax planning to avoid heavy tax bills.
Understanding Inheritance Tax in the UK
Inheritance Tax is a tax on the estate of someone who has died, including property, money, and possessions. Currently, only estates valued above a tax-free threshold—known as the nil-rate band—are liable for IHT. This threshold is £325,000 per individual and has been frozen at this level since 2009. This freeze means inflation and rising property values have pushed many families into the tax net where they might not previously have faced IHT.
In addition, there is a residence nil-rate band (RNRB) of £175,000, an extra allowance introduced in 2017. It is designed to benefit those passing on a main residence to children or grandchildren. The combined effect means married couples can potentially leave up to £1 million tax-free. Yet, like the main nil-rate band, the RNRB has not kept up with inflation, effectively tightening the threshold.
For estates above this threshold, the standard rate of Inheritance Tax is 40% on the value above the allowance. Special rules apply to gifts made before death as well as to trusts and certain pensions.
Why the Inheritance Tax Warning in 2025?
The government is introducing far-reaching changes to Inheritance Tax from 6 April 2025. The primary motivation is to increase tax revenues and address perceived loopholes while updating tax rules to reflect modern circumstances. Key reforms will change how liability to IHT is determined for non-UK domiciled individuals by replacing domicile rules with residency-based criteria. This impacts a wide group of people including expatriates, international investors, and others with global assets.
Additionally, there could be significant shifts in reliefs and exemptions. Experts and interest groups have warned that some reforms may create “a climate of uncertainty and confusion,” particularly for farms and family businesses, urging delays to some changes.
Among the most controversial possible changes is the removal of taper relief, which currently reduces the tax payable on gifts made more than three years before death. Its abolition would mean all gifts within seven years of death might be taxed at the full 40% rate, potentially increasing tax bills significantly.
Key 2025 Inheritance Tax Reforms Explained
Residency-Based Scope for Non-Doms
Previously, IHT applied according to a person’s domicile status, a complex legal concept different from residency. From April 2025, the test changes to whether an individual has been resident in the UK for at least ten out of the last 20 tax years (long-term residents). If so, their worldwide assets come within the IHT scope, subjecting those assets to tax on death or gift into trust. This is a quicker timeline than before, as 10 years replaces the previous 15, with ripple effects for estate planning.
Implications include:
- UK long-term residents will pay IHT on global assets, not just UK-based ones.
- Those leaving the UK remain liable for some years if deemed long-term residents.
- Trusts settlor’s residence status now affects which assets in trust face IHT.
Changes to Reliefs and Allowances
There is speculation the government might reduce IHT thresholds or remove the Residence Nil-Rate Band, which would drag more family homes into the tax net, hitting middle-class households particularly hard. Other reforms under consideration include capping Agricultural Property Relief and Business Property Relief to £1 million combined value, with excess assets receiving only partial relief from April 2026. This could lead to effective tax rates of 20% or more on some business and farm assets.
The potential scrapping of taper relief would eliminate gradual tax reduction on gifts made several years before death, increasing tax bills on lifetime gifts.
Pension Funds and IHT
From April 2027, pension funds will become part of the IHT estate. Previously, unused pension funds and death benefits were excluded. This development could affect thousands of families who will need to factor pensions into their inheritance tax planning.
What Does This Mean for UK Families?
The combined effect of freezing thresholds for over a decade, reforming non-domicile rules, and tightening reliefs puts many families at risk of unexpected large IHT bills. Rising property values and widespread home ownership mean more estates could exceed the threshold now than ever before.
Without timely planning, families might lose significant inheritance value to tax. The removal of taper relief and RNRB would especially impact those with larger estates or who have made gifts in the years before death.
Case studies illustrate this starkly: for example, a £900,000 estate where gifts to children were previously shielded by taper relief could see its IHT bill quadruple if this relief disappears. Another case shows a £480,000 estate no longer benefiting from RNRB due to these reforms, increasing tax due by tens of thousands of pounds.
Expert Advice and Official Guidance
Financial advisors urge families to review their estates now rather than wait. Gifts made under current rules remain protected, so acting before reforms are finalised is critical. Using existing exemptions, trusts, and allowances can mitigate future tax bills, but the landscape will become more complex.
Official UK government guidance on IHT thresholds, allowances, and tax payable remains a vital resource for families aiming to plan effectively. It also explains how various reliefs work and the specific rules around gifts made within seven years of death.
Estate and Tax Planning Tips
To minimise inheritance tax exposure amid these reforms, UK families should:
- Regularly review and update wills and estate plans.
- Consider lifetime gifts where possible, using current taper relief.
- Seek advice on trusts and reliefs that work under new rules.
- Plan for pension inclusion in estates from 2027.
- Use all eligible allowances, such as the nil-rate band and residence nil-rate band, while available.
- Understand the residency status rules affecting non-doms.
Planning early is essential as delays could mean losing valuable tax planning opportunities and burdening heirs with inflated tax bills.
Conclusion: Navigating Uncertainty with Informed Planning
The 2025 inheritance tax changes mark one of the most significant reforms in recent years, affecting a broad cross-section of UK families. Frozen thresholds, new residency rules, reduced reliefs, and pension fund inclusion create a complex and shifting tax environment.
For families wishing to protect their legacy, early engagement with professional advisers familiar with these changes is critical. Understanding the evolving legislation and its impacts will help households plan realistically and leverage current exemptions to reduce future tax bills.
The British public should heed the inheritance tax warning now and act to secure their estates for the next generation without unnecessary tax losses.
FAQs About UK Inheritance Tax in 2025
- What is the current threshold for inheritance tax in the UK?
The current nil-rate band is £325,000 per person, frozen since 2009. The residence nil-rate band adds £175,000 for homes passed to direct descendants, making a potential £500,000 allowance per individual.
- What changes to inheritance tax are coming in April 2025?
Key changes include applying IHT based on UK residency rather than domicile for non-doms, potential removal or reduction of reliefs such as taper relief and residence nil-rate band, and new rules on trusts and lifetime gifts.
- How will pension funds be affected by inheritance tax?
From April 2027, unused pension funds and death benefits will be included in the estate for IHT purposes, potentially increasing tax liability.
- Who pays inheritance tax and at what rate?
Individuals with estates above the threshold pay 40% tax on amounts above the nil-rate band. Spouses inherit tax-free, and gifts made more than seven years before death are usually exempt.
- How can I reduce the impact of inheritance tax under these new rules?
Planning early is essential. Options include gifting while alive under current rules, setting up certain trusts, using all available allowances, and seeking professional advice to navigate the new residency-based criteria and relief changes.
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