Inheritance Tax – what changed, what didn’t and how to plan ahead

After the unexpected and fundamental changes to Inheritance Tax (IHT) in last October’s Budget this year’s relative silence on the subject was a welcome relief.

Speculation ahead of the Budget suggested there may be further radical reforms including:

• A cap on the amount that an individual could gift during lifetime
• Extension of the seven year rule to ten or even 12 years
• Removal of taper relief on gifts made within seven years before death
• Possible reform or abolition of the Residence Nil Rate Band

In the end these predictions proved unfounded with only two main announcements made in relation to IHT.

Extension of threshold freezes

Following strong reactions – particularly from the farming sector – to last year’s changes the Chancellor chose to rely on fiscal drag rather than headline changes to boost revenue.

The nil-rate band (NRB) remains at £325,000 and the residence nil-rate band (RNRB) at £175,000, now frozen until April 2031. This means the thresholds will have been static for 22 years, despite rising property and asset values. The freeze operates as a stealth tax, pulling more estates into the IHT net over time. The Office for Budget Responsibility forecasts IHT receipts will rise from £9 billion in 2025/26 to £14.5 billion by 2030/31.

The NRB has been frozen at £325,000 since 2009. Had it tracked inflation, estimates suggest it would now exceed £500,000 by 2029/30. Combined with the RNRB, a couple could have passed on £1 million tax-free under current rules, but if uprated for inflation, that figure might have approached £1.35 million – a stark illustration of fiscal drag.

Reducing exposure to lifetime gifting remains key to reduce exposure to IHT. The seven year rule continues to apply allowing a taxpayer to make unlimited gifts to individuals which will fall out of the scope of IHT provided the taxpayer survives seven years. Trusts continue to be a useful tool both in tax planning and asset protection and a couple could gift £650,000 into trust every seven years without crystallising an IHT charge.

Agricultural and Business Property Relief (APR/BPR)

The significant change to IHT announced in last year’s Budget was the introduction of a combined cap of £1 million on the value of assets qualifying for 100% APR or BPR where gifts are made by an individual on or after 6 April 2026. Any qualifying assets exceeding this cap will attract only 50% relief, resulting in an effective IHT rate of 20%.The cap will also apply to any lifetime gifts made on or after 30 October 2024, where the donor dies after 5 April 2026 and within seven years of the gift.

After significant lobbying from the farming and business sector the Government has now announced that the £1 million APR/BPR allowance will be transferable between spouses and civil partners. This will give a £2 million allowance on the second death assuming it was not used on the first death.

Any unused allowance will be transferable to the surviving spouse or civil partner even if the first death took place before the new rules come in on 6 April 2026.

This is a welcome fix for farmers and business owners and reduces the need to make lifetime transfers of farming and business assets between spouses and civil partners to ensure that their family can benefit from two £1 million allowances.

The need to plan ahead for succession to a family farm or to a business remains. The £1 million allowance refreshes after seven years, meaning a farmer or business owner can gift qualifying assets to individuals or trusts every seven years. Provided they survive for seven years from the date of each gift, the full allowance becomes available again for future transfers. A taxpayer who begins gifting at an early age can therefore potentially benefit from multiple £1 million allowances over their lifetime.

Lifetime gifting before 6 April 2026 – and beyond – is a vital tool in maximising claims to APR and BPR and minimising liability to IHT. Tailored advice specific to a taxpayer’s circumstances must be sought however to ensure that all taxes such as Capital Gains Tax are considered prior to making any gifts.

Succession planning must also address family dynamics, business continuity, and long-term objectives. For example, gifts may require partnership agreements to be updated or shareholder agreements to be put in place.

How we can help

As we approach 6 April 2026 we would be happy to advise on any steps that may take to navigate the IHT changes and to manage the tax exposure while maximising the family wealth. Please contact Alison.Pryde@andersonstrathern.co.uk for more information or guidance on this issue.