The UK inheritance tax reforms of 2025 to 2027 change who is caught, how farms and family businesses are relieved, and whether a pension counts as part of your estate. The 40% rate and the £325,000 nil-rate band stay put. Two of the most-quoted figures have moved since first announced, and many guides still show the old numbers. General information for England and Wales, not advice.
What are the current UK inheritance tax reforms, and when do they take effect?
| Reform | What changes | Takes effect |
|---|---|---|
| Residence-based system | Long-term UK residence, not domicile, decides whether worldwide assets are taxed | 6 April 2025 |
| Farm and business relief cap | 100% relief on the first £2.5m per person, 50% above that (raised from £1m) | 6 April 2026 |
| Unused pensions in the estate | Most unused pension funds and death benefits count as part of the estate | 6 April 2027 |
| Threshold freeze extended | £325,000 NRB and up to £175,000 RNRB held until 5 April 2031 | In force now |
Source: gov.uk, Inheritance Tax and Autumn Budget 2025, as at August 2026, subject to change.
Taken together, these reforms widen the base rather than raise the rate. More estates pay because thresholds are frozen while asset values rise, and two large asset classes, farms or businesses and pensions, lose part of their old shelter.
What is the new residence-based inheritance tax system from April 2025?
This mainly affects internationally mobile families and long-settled non-domiciled residents, who now come into worldwide scope after 10 years rather than the old 15. UK-situated assets, such as a home in England or Wales, were always in scope and remain so.
There is also a tail after leaving the UK. Someone resident between 10 and 13 years falls outside the net on non-UK assets after three tax years abroad, and that tail lengthens with each further year of residence up to a maximum of 10 years for the longest-resident individuals.
Source: gov.uk, reforming the taxation of non-UK domiciled individuals, as at August 2026, subject to change.
How is farm and business relief changing, and why is £1m wrong?
The £1m figure came from the Autumn Budget 2025 on 26 November 2025. It was superseded on 23 December 2025, when the government confirmed the higher £2.5m per person allowance. Because most summaries were written in the weeks in between, the old number is still circulating and understates the relief now available.
| Feature | First announced (26 Nov 2025) | Confirmed (23 Dec 2025) |
|---|---|---|
| 100% relief cap per person | £1m | £2.5m |
| Transferable to a spouse | Yes | Yes, up to £5m per couple |
| Relief above the cap | 50% | 50% |
| Effective date | 6 April 2026 | 6 April 2026 |
Source: gov.uk, APR and BPR reforms, as at August 2026, subject to change.
Value above the cap is relieved at 50%, giving an effective 20% inheritance tax charge on that excess. A farm or family company left over the £2.5m line therefore keeps meaningful relief, but not the full shelter it had before. We cover the detail in inheritance tax on farms from April 2026.
Why will unused pensions face inheritance tax from April 2027?
This is the reform that reaches ordinary savers. A pension that once sat outside inheritance tax may now be counted next to the house. Your executors, not the pension scheme, report and pay the charge, so an estate needs enough cash to settle a bill before assets are sold. A worked example sits in pensions and inheritance tax from 2027.
Source: gov.uk, Inheritance Tax on pensions technical note, as at August 2026, subject to change.
How long are the inheritance tax thresholds frozen?
A single person can pass up to £500,000 free of inheritance tax where a home goes to children or grandchildren, and a couple up to £1m combined. The residence band is withdrawn by £1 for every £2 an estate exceeds £2m, so it tapers away entirely on larger estates (how inheritance tax works).
Source: gov.uk, Inheritance Tax, as at August 2026, subject to change.
What do the reforms mean for a typical estate, and what should you do?
Consider a widow in England with a £450,000 home passing to her children and a £250,000 unused pension. Before April 2027 the pension sits outside inheritance tax. From April 2027 it is added, giving a £700,000 estate. Her own bands (£325,000 plus £175,000 residence band) and the £325,000 nil-rate band inherited from her late husband cover it, so no tax is due here. Push the pension or home higher, though, and the frozen bands are quickly exceeded.
- Confirm which reforms reach you. The residence-based and farm relief changes affect a minority of estates. Most families are touched only by the pension change and the frozen bands.
- Correct any plan built on £1m. If farm or business planning assumed a £1m relief cap, revisit it against the confirmed £2.5m per person, £5m per couple.
- Review your pension nominations. A pension left to a spouse or civil partner stays exempt from April 2027, so check your expression of wishes reflects who you intend to benefit.
- Use the gift exemptions that still stand. The £3,000 annual exemption, £250 small gifts and the seven-year rule with taper on the tax were untouched (how much you can gift tax free).
- Take joined-up advice before large moves. These taxes interact, so a financial adviser and your estate planner are best consulted together before emptying a pension or restructuring a business.
Most people fold these checks into their wider estate planning. For a discreet review, you can book a consultation or see our fixed pricing.
Frequently asked questions
What are the new inheritance tax rules in the UK?
Four reforms are rolling out: a residence-based system from 6 April 2025 that replaces domicile, a cap on farm and business relief from 6 April 2026, unused pensions brought inside estates from 6 April 2027, and the nil-rate bands frozen until 5 April 2031. The 40% rate and the £325,000 nil-rate band are unchanged.
Is the £1 million farm and business relief cap still correct?
No. The £1m figure was the first announcement on 26 November 2025. On 23 December 2025 the government confirmed the cap starts at £2.5m per person, transferable to £5m per couple, from 6 April 2026. Value above the cap keeps 50% relief. Many reform summaries still show the old £1m number.
When do pensions become subject to inheritance tax?
From 6 April 2027. Most unused pension funds and lump sum death benefits will count as part of your estate and can be charged at 40% above your available bands. Pensions passing to a spouse or civil partner keep the spousal exemption, so the charge tends to arise where a pension goes to children or others.
How long are the inheritance tax thresholds frozen for?
Until 5 April 2031. The Autumn Budget 2025 extended the freeze on the £325,000 nil-rate band, the residence nil-rate band of up to £175,000, and the £2m taper threshold by a further year, having previously been due to end in 2030 (gov.uk, as at August 2026, subject to change).
Who does the new residence-based inheritance tax system affect?
Mainly internationally mobile individuals and long-settled non-domiciled residents. From 6 April 2025, a person resident in the UK for at least 10 of the previous 20 tax years is a long-term resident and taxed on worldwide assets. UK-situated assets, such as a home in England and Wales, were always in scope.