Inheritance tax is changing: Are you and your clients ready?

Major inheritance tax reforms could impact pensions, family businesses, and agricultural property – here’s the information you need to stay ahead.

The UK government is introducing significant changes to IHT, particularly in relation to pensions, death benefits, APR, and BR. These reforms could reduce the amount of wealth your clients are able to pass on to loved ones and may impact how family businesses and farms are transferred to future generations. By limiting available tax reliefs, these changes could lead to higher IHT bills for many estates across the UK.

Here’s a clear breakdown of what’s changing and how it might affect you and your clients.

• Most unused pension pots and death benefits are not currently considered part of a deceased person’s estate for IHT purposes. This means families can often inherit unused pension funds without paying IHT.
• Many pensions include a feature called ‘death benefits’, which allows the remaining money in a pension pot to be passed on when someone dies. These benefits are usually free from IHT and don’t count towards the value of the estate.
• Death benefits are typically tax-free if the deceased was under 75. If they were 75 or over, the recipient may need to pay income tax on the benefits, but no IHT.

From 6 April 2027, the UK government will tighten how IHT is applied to unused pension savings and death benefits. The aim is to ensure that pensions are used primarily for retirement income rather than inheritance planning.

Key highlights include:

• Unused pension pots and death benefits under UK registered pension schemes, (including both defined contribution and defined benefits schemes) will be included in the deceased’s estate for IHT purposes.
• Tax rate: if the total value of the estate, including unused pension funds, exceeds the IHT threshold (£325,000), any amount over this threshold could be taxed at 40%.
• Exemptions: while unchanged, pension death-in-service benefits paid to a spouse or civil partner will remain exempt from IHT, provided they’re UK domiciled. Dependants’ scheme pensions and charity lump sum death benefits will also remain exempt.

These changes are likely to impact:

• Individuals with pension savings who plan to leave unused funds to their loved ones.
• Beneficiaries inheriting estates that include pensions and exceed the IHT threshold.
• Estates that were previously below the IHT threshold but may now become liable due to the inclusion of unused pension funds.

The government estimates that around 38,500 estates will pay more IHT under these new rules, and an additional 10,500 estates that were not previously liable for IHT will face a tax bill.¹

If you have substantial pension savings, these changes could reduce the amount of wealth that loved ones inherit. For example:

• If there is £500,000 in unused pension funds, and the estate exceeds the IHT threshold, the IHT bill on your total estate could be up to £200,000 (40%).

The responsibility for reporting and paying IHT will remain with the personal representatives – the person legally responsible for managing the deceased’s estate and already tasked with handling IHT.

The government has provided a full breakdown of the changes here, including the process for reporting and paying IHT on pensions from 6 April 2027.

APR and BR are tax reliefs designed to help families keep their farms and businesses intact without having to sell assets to pay IHT.

• Agricultural Property Relief: reduces the taxable value of qualifying agricultural property, such as farmland or farm buildings.
• Business Relief: reduces the taxable value of qualifying business assets, such as business premises or shares in private companies.

Currently, both APR and BR offer unlimited 100% tax relief on qualifying assets, meaning no IHT is due on them.

From 6 April 2026, the government will introduce new limits on how much APR and BR can reduce IHT liability. These are the key changes:

1. £1 million cap on 100% relief
   • Each individual will have a £1 million allowance for assets that qualify for 100% APR or BR (or both combined).
   • This allowance is per individual and cannot be transferred to a spouse or civil partner.
   • For example, if you own £1.5 million in qualifying assets, only the first £1 million will qualify for 100% relief.
2. 50% relief for excess value
   • Any qualifying assets above the £1 million allowance will only receive 50% relief, instead of 100%.
   • For example, if your farm is worth £1.5 million, £1 million will be fully exempt from IHT, but the remaining £500,000 will only receive 50% relief. This means £250,000 will be taxable at 40% (£100,000).
3. Reduced relief for private company shares
   • Shares in private companies (such as those not listed on recognised public stock exchanges like the Alternative Investment Market) will qualify for 50% relief, instead of 100%.
4. Trusts get their own allowance
   • Trusts created before 30 October 2024 have their own £1 million allowance for tax relief.
   • Trusts created after this date share the £1 million allowance with other trusts set up by the same person.
   • Trust allowances will refresh every 10 years.
5. Life tenant trusts share allowances
   • Trusts where a beneficiary has the right to income (known as Qualifying Interest in Possession trusts) will share the £1 million allowance with the beneficiary’s personal estate when they pass away.
6. Transitional rules for transfers
   • Transfers of qualifying assets made between 30 October 2024 and 6 April 2026 will initially be assessed under the current rules.
   • However, if the original owner passes away within seven years, the new rules will apply retroactively.

These changes could impact individuals with:

• Farms or agricultural property: if the property is not actively farmed or rented for agricultural use, it may no longer qualify for APR.
• Family businesses: businesses with investment-focused activities, such as property letting, may lose eligibility for BR.
• Diversified operations: farms or businesses with mixed activities (e.g. farming combined with tourism or renewable energy projects) may face reduced relief.

Now is the time to understand how these reforms could affect estates and take proactive steps to protect your clients’ wealth. Here’s how you can prepare.

1. Review current investment and IHT strategy
   • Pensions in estate plan: with the introduction of new rules on IHT, pensions may become less tax-efficient for inheritance planning. You may need to explore alternative strategies to help achieve your clients’ goals.
   • Agricultural and business property: assess the value of qualifying assets and how much currently benefits from APR or BR.
   • Make the most of allowances: the cap on APR and BR assets means it could be worth reviewing your clients wills to consider whether using these allowances on the first death is the right approach for them.
2. Consider alternative options Explore strategies to reduce your clients’ estate’s IHT liabilities while passing on more of their wealth to loved ones. Some options include:
   • Gifting assets: making gifts during your lifetime can reduce the size of your taxable estate. This could include direct gifts or gifting from regular income.
   • Setting up trusts: trusts can help you manage how and when wealth is passed on, while also providing potential tax benefits.

The value of investments, and any income from them, can fall and you may get back less than you invested. RBC Brewin Dolphin is not a tax specialist and this does not constitute tax advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

RBC Brewin Dolphin is a trading name of RBC Europe Limited. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
¹Inheritance Tax on pensions: liability, reporting and payment — Summary of responses