The latest Budget just blew up everything we thought we knew about Inheritance Tax planning.
If you’ve been relying on things like Agricultural Property and Business Relief to protect your assets, or thought pensions were safely out of reach, think again.
Suddenly, all the strategies people counted on to keep wealth in the family are being pulled right into the taxman’s grasp.
So, what exactly happened? And what does it mean for your plans? Let’s dive in.
Frozen allowances and less reliefs
In a move that’s bound to hit more families, the Budget has frozen the Nil Rate Band (NRB) and the Residence Nil Rate Band (RNRB), the main allowances whereby no Inheritance Tax is paid, until at least April 2030.
The Nil Rate Band, set at £325,000, has remained unchanged since 2009, and the Residence Nil Rate Band, introduced in 2017, currently sits at £175,000. But freezing these thresholds in a time of rising asset values effectively drags more people into paying Inheritance Tax.
With inflation pushing up the value of homes and investments, many estates that would have previously been under the threshold will now be pushed into taxable territory.
For example, a family home worth £300,000 in 2009 would have avoided Inheritance Tax if this was the only asset.
However, since 2009 house prices have increased by around 84%. This means the same family home could now be worth £553,020 meaning a potential £91,208 Inheritance Tax bill needing to be paid by their loved ones.
While the family may have initially fallen within the allowances, the freeze means they’ll now face a sizable tax bill, often forcing heirs to sell assets just to cover the tax burden.
Changes to Agricultural Property Relief and New Tax Burdens
The recent Budget has not only tightened eligibility for Agricultural Property Relief but has also introduced a cap on the relief amount, which previously allowed up to 100% Inheritance Tax exemption on qualifying farmland and buildings.
From April 2026, Agricultural Property Relief is capped at £1 million, with any value beyond this threshold facing a new 20% Inheritance Tax rate.
This adjustment adds a significant tax burden to family farms, which were often able to pass down large areas of land without incurring tax.
Previously, a farm valued at £1.5 million, the entire value might have qualified for Agricultural Property Relief if the property met the necessary criteria, shielding it completely from Inheritance Tax.
From April 2026 however, only the first £1 million qualifies for the 100% relief, while the remaining £500,000 will be subject to the new 20% Inheritance Tax rate.
This change creates a £100,000 tax liability on the additional value.
For many farming families, this added cost might force them to sell off a portion of the farm to cover the tax burden, potentially jeopardizing the continuity of generational farming operations.
Changes to Business Relief and Impact on AIM Stocks
Business Relief has long been an attractive planning tool for those investing in shares of small businesses or companies listed on the Alternative Investment Market (AIM).
Historically, holdings in AIM-listed companies qualified for up to 100% Business Relief if they were held for at least two years, allowing investors to shield these assets from Inheritance Tax while investing in high-growth, innovative companies.
But, from April 2026 the budget has now restricted Business Relief for AIM stocks, specifying that only actively managed businesses—not passive investments in companies—will qualify.
A 50% relief will apply in all circumstances on AIM shares, setting the effective rate of tax at 20%.
This change directly impacts investors holding AIM stocks as a strategy to reduce their taxable estate.
For example, an investor who has built a £500,000 portfolio of AIM stocks, would previously have expected that the investment would be free from Inheritance Tax after two years.
With the new restrictions from April 2026, this investment could face a 20% Inheritance Tax charge on death, meaning a potential bill of £200,000.
The good news is that you still have just under two years before these changes come into force. For those who are currently holding AIM stocks and have held them for at least two years, these could be gifted to your beneficiaries or a Discretionary Trust now before the changes take place, free of Inheritance Tax.
Proposed Changes to Pensions and Inheritance Tax: A Major Shift
The latest budget announcement has shaken up the world of Inheritance Tax planning by proposing that pensions will soon be included in the Inheritance Tax net.
For years, pensions have been one of the most effective tools for reducing Inheritance Tax liabilities, allowing people to pass on significant wealth to their beneficiaries without incurring a tax charge.
As pensions are often a person’s second-largest asset after their home, this shift will have a dramatic impact on the inheritance landscape, potentially driving up Inheritance Tax bills for families across the UK.
Under the new proposals, set to take effect in April 2027, the value of a pension pot will be counted towards the estate for Inheritance Tax purposes upon death.
Previously, pensions were generally exempt from Inheritance Tax, giving them a unique advantage in estate planning.
Many people have used their pension pots as a tax-efficient way to pass wealth to loved ones, often drawing on other assets first in retirement to preserve pensions for inheritance.
This change will significantly increase the tax burden on beneficiaries, who may now face a 40% Inheritance Tax charge on their inherited pension assets.
For example, a person with a £1 million pension pot who had previously anticipated this asset would pass free of Inheritance Tax may now leave their beneficiaries facing an additional £400,000 tax liability.
Adding to the complexity is the fact that beneficiaries are already subject to tax on inherited pension income if the pension holder dies after the age of 75.
Currently, beneficiaries of a pension from someone who dies post-75 must pay Income Tax on any withdrawals at their marginal tax rate.
The proposed changes will mean that, in addition to Income Tax, beneficiaries could also face a hefty Inheritance Tax bill on the same pension pot.
This could lead to a situation where, depending on the size of the pension and the beneficiaries Income Tax rate, a significant portion of the inheritance is lost to combined Inheritance Tax and Income Tax charges which could mean an effective tax rate of 67% on pension funds.
The fact the government are waiting until April 2027 to introduce this means it is going to be highly complex to sort out. So, it’s not definite the proposed rules will stay exactly as planned,
This gives us time to plan ahead but moving pensions away from Inheritance Tax will be tricky as you can’t gift pension money away without already paying Income Tax on it first.
Planning Ahead to Minimize Inheritance Tax
With these changes on the horizon, the best path to avoiding a substantial Inheritance Tax bill may now involve a combination of strategic gifting and insurance policies.
By gifting assets either directly or through trusts, families can start moving wealth out of the estate over time, reducing what’s subject to Inheritance Tax.
Trusts, in particular, allow for more control over when and how beneficiaries receive assets while providing some protection against Inheritance Tax if properly structured.
Insurance policies can also play a valuable role, especially when it comes to covering any remaining Inheritance Tax liabilities. Many people now consider setting up a life insurance policy placed in trust specifically for this purpose, ensuring that loved ones have the funds to cover the Inheritance Tax bill without needing to liquidate other assets.
Think of an insurance policy not as an insurance policy but a guaranteed investment savings vehicle.
Fortunately, we have a two- to three-year window before some of these changes come into effect, making it crucial to start planning now.
Thoughtful consideration will be needed when it comes to which assets to draw down and which to preserve for inheritance, as well as determining what should be gifted during one’s lifetime.
By taking early, strategic steps, families can protect as much of their wealth as possible, even as the tax landscape becomes more challenging.
If you would like to stress test your legacy planning or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
