Potential Changes to the Inheritance Tax in the Forthcoming UK Budget

As the UK government prepares to announce its forthcoming Budget on November 26th, speculation is mounting regarding possible reforms to the inheritance tax (IHT) regime. Inheritance tax has long been a subject of political debate, with calls for both radical overhaul and incremental changes. The Labour government’s October 2024 Budget already introduced a number of changes to IHT and many commentators expect further adjustments to address revenue needs and political pressures.

This article examines the current structure of inheritance tax in the UK, outlines some potential changes that may be proposed in the upcoming Budget and analyses some of the possible implications for individuals & families.

To understand the room for further change, it helps to summarise what has already been announced.

What Has Already Been Announced?

Nil-rate Band

The nil-rate band (the amount an individual can pass on tax-free) remains at £325,000 and the residence nil-rate band at £175,000, (an extension of the nil rate band if the residential home is left to lineal descendants), with both thresholds frozen until April 2030.

Business Property Relief and Agricultural Property Relief

From April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) will be reformed: the first £1 million of qualifying business or agricultural assets will still enjoy full relief but amounts above that will benefit from only 50% relief, effectively subjecting the excess to a 20% IHT rate instead of zero.

Unused Pension Funds and Death Benefits

From April 2027, most unused pension funds and death benefits will be included within an individual’s estate for IHT purposes, attracting 40% IHT and with the beneficiaries also being subject to Income Tax at their highest rate on what is left!

Residency and Non-domicile Status

On the issue of residency and non-domicile status, the government shifted from a domicile-based IHT regime to a long-term residence-based one, effective from 6 April 2025. Under this new test, an individual who qualifies as a “non long-term UK resident” (e.g. being non resident 10 of the prior 20 years) would be only subject to IHT on those assets still situated within the UK.

What Further Changes May Be Proposed?

A range of potential changes to inheritance tax have been suggested by policymakers, think tanks and industry experts. These could deepen revenue extraction or close remaining perceived loopholes.

Reforming The Residential Nil-rate Band

The residence nil-rate band has added complexity to the tax system. There is speculation that the government may simplify or abolish this additional allowance, or alternatively, broaden its scope so that more estates qualify.

Capital Gains Tax (CGT)

CGT is currently not charged on the increase in an asset’s value between date of acquisition and date of death. Inheritance tax is simply calculated on the value of the assets at date of death. If that asset had been sold shortly before death, then CGT would be payable on the gain as well as IHT at date of death. Accordingly, there is an argument for CGT to also be payable by the Estate.

Lifetime Gifts

Currently, gifts made more than seven years before death are exempt from IHT. The government may consider lengthening this period, limiting it, or introducing a lifetime gifts tax, like systems in Ireland and other countries.

Deeds of Variation

Deeds of Variation are also known as deeds of family arrangement, and it is often the case that the family of a deceased will agree between themselves that wealth should be shared other than had been conceived by the deceased. Families may enter into such agreements within two years from date of death where perhaps there has been a change in circumstances for one or more of the beneficiaries or, because of for example, perceived unfairness or error in the original Will. These documents are commonly used to reduce IHT liability. The Chancellor may potentially target those using Deeds of Variation to avoid paying IHT.

Restricting Tax Free Lump Sums From Pension Funds

25% of the fund can typically be taken tax-free currently subject to a maximum monetary amount set at £268,275.

The government could look to water down this pension perk. For instance, reduce the tax-free cash percentage to say 20%, or set a stricter limit on the monetary amount. 

Withdrawing the maximum amount allowed, gifting that to family and surviving 7 years is a common procedure which could therefore be under threat.

The government could look to water down this pension perk. For instance, reduce the tax-free cash percentage to say 20%, or set a stricter limit on the monetary amount. Withdrawing the maximum amount allowed, gifting that to family and surviving 7 years is a common procedure which could therefore be under threat.

The crucial thing to remember is that, for the moment, this is all pure speculation but fascinating from our viewpoint.

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At Maplebrook Services, we help clients by:

• Drafting legally robust Wills that clearly state your wishes.

• Offering secure Will storage.

• Offering probate support to ensure your estate is administered safely and efficiently.

  
  

All advisors at Maplebrook Services are fully qualified Will writers, registered with the Institute of Professional Will writers, who undergo regular Continuing Professional Development through numerous webinars, weekly updates and notifications of forthcoming/new legislation. Maplebrook Services Limited has €2.4 million of Professional Indemnity Insurance.

Contact Maplebrook Services Ltd today to assist you in creating an effective Will, protect your estate and ensure your assets go to the people you choose.

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