Inheritance Tax Changes 2025 — Pensions, Agricultural Land, and What It Means for Your Estate
The Autumn Budget 2024 announced significant changes to Inheritance Tax that will take effect from April 2026 and April 2027. Pension pots are coming into scope and agricultural property relief is being capped — here is what every estate planner needs to know.
Pensions and Inheritance Tax — The Major Change
Currently, unspent defined contribution pension funds (personal pensions, SIPPs, workplace pensions) sit outside your estate for Inheritance Tax purposes. This makes pensions one of the most powerful tax-efficient wealth transfer vehicles available — many people deliberately leave their pension untouched and pass it to beneficiaries free of IHT. From April 2027, this exemption will end. Unspent pension pots will be included in your estate and potentially subject to Inheritance Tax at 40% above the available nil-rate bands.
The impact will depend on the size of the pension, who the beneficiaries are, and what other assets form part of the estate. Married couples and civil partners who leave the pension to their spouse or civil partner will still benefit from the spousal exemption — but pensions left to children, grandchildren, or other beneficiaries will be exposed to IHT for the first time. The government has estimated that around 8% of estates will be newly affected by the change.
Agricultural Property Relief — Capped
Agricultural Property Relief (APR) and Business Property Relief (BPR) have historically provided 100% relief from IHT on qualifying agricultural land and business assets. From April 2026, these reliefs will be capped — the first £1 million of combined APR and BPR qualifying assets will continue to attract 100% relief, but anything above £1 million will only receive 50% relief (an effective 20% IHT rate on the excess). This has been highly controversial, particularly among farming families, who argue that agricultural land values mean many farms will exceed the threshold and face significant tax bills that may force sales.
What Stays the Same
The following IHT rules are unchanged by the Budget:
- The nil-rate band remains at £325,000 (frozen until at least 2030)
- The residence nil-rate band remains at £175,000 (subject to tapering for estates over £2 million)
- Both nil-rate bands remain transferable between spouses and civil partners on death
- Gifts made more than seven years before death remain exempt from IHT
- Annual gift exemption (£3,000 per year) and small gifts exemption (£250 per person) are unchanged
- The spousal exemption (transfers between spouses and civil partners are IHT-free) remains in full
- Charitable legacies remain exempt and can reduce the IHT rate to 36%
Planning Strategies to Consider
In light of these changes, several planning strategies are worth discussing with a financial adviser or solicitor:
- Drawdown from pensions — consider taking income from your pension earlier than planned to reduce the unspent pot that will be subject to IHT from 2027, particularly if your estate is already above the nil-rate band.
- Making gifts — outright gifts from pension drawdown can fall outside the estate after seven years. The annual gift exemption (£3,000/year) is immediately exempt.
- Trust planning — certain trust structures can shelter assets from IHT, though trust tax rules are complex and must be reviewed carefully.
- Life insurance — a whole-of-life insurance policy written in trust can provide a lump sum to meet an IHT liability without increasing the taxable estate.
- Review existing wills — pension nomination of beneficiary forms and will structures may need updating in light of the pension IHT change.
The Frozen Nil-Rate Band — The Quiet Killer
While the headline changes grab attention, do not overlook the continuing impact of frozen nil-rate bands. The NRB has been frozen at £325,000 since 2009 — meaning it has not kept pace with house price inflation. A house worth £200,000 in 2009 may now be worth £400,000 or more. As a result, many estates that would not previously have been subject to IHT are now caught by it. The freeze is set to continue until at least 2030, meaning the proportion of estates paying IHT will continue to rise even without any other changes.