Inheritance Tax Planning Ahead of the 2025 Budget

Ahead of the Autumn Budget 2025,  Paul Harris, Private Client Tax Partner looks at the significant reforms to inheritance tax (IHT) announced last October – that so many of you will be so acutely aware of, not least because the farming community have kept them very much in the news.

Indeed, a recent report predicted that the Government’s total IHT take could reach £9 billion by 2027 – up by around £2 billion since 2022/23 – and it will not only be farms and other family businesses that are hit, but whole swathes of “Middle England” with pension savings, valuable property or significant savings included.

Moreover, a combination of the Chancellor’s continuing economic headaches and Labour’s manifesto commitment not to increase income tax, National Insurance contributions or VAT, are widely expected to lead to the announcement of further changes in the Budget on 26 November, albeit some or all of the changes may not be implemented until a later date.

To recap on the key IHT changes already legislated: 

• Cap on business and agricultural relief: from April 2026, 100% Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped at a combined value of £1 million. Any qualifying assets above this amount will receive a reduced 50% relief, with the cap applying separately to individuals and (subject to complex rules) trusts.
• Pensions to become taxable: from April 2027, most unused pension funds will be included in an individual’s estate for IHT purposes. This represents a very significant shift, as private pensions have historically been exempt from IHT.
• Thresholds frozen until 2030: the nil-rate band of £325,000 and the residence nil-rate band of £175,000 are frozen at their current levels until at least April 2030. Due to inflation and rising asset prices, this “fiscal drag” is expected to bring more estates into the IHT net.
• New residency-based tax system: since April 2025, the historic domicile-based IHT system has been replaced with a residence-based one. This could bring the worldwide assets of long-term UK residents within the scope of IHT.

 What potential changes could we see in the 2025 Autumn Budget?

• Lifetime gifting cap: the Government is reportedly considering a lifetime cap on the value of gifts that can be made free of IHT. Currently, gifts to individuals of any amount are potentially exempt if the donor survives for seven years.
• Changes to the 7-year rule: the time frame for potentially exempt transfers could be extended beyond seven years, with some commentators suggesting a period of 10 or even 14 years.
• Reform of gifting exemptions: there could be reviews of or restrictions on exemptions, such as the £3,000 annual gift allowance.
• Further changes to reliefs: the Government may continue to restrict or remove other IHT reliefs, especially if they are deemed unfair or costly to the taxpayer.
• Flat-rate IHT: some analysts suggest the Government may consider a simplified flat-rate IHT regime, potentially replacing the current ‘cliff edge’ 40% rate with one applied more broadly.

So, what actions could you consider ahead of the Budget?

The confirmed and potential changes outlined above highlight the importance of proactive estate planning. Because for those with substantial pension pots, businesses, or agricultural holdings, reviewing your arrangements before the relevant reforms come into force is now critical.

Key strategies to consider include:

• Reviewing your Will: Ensure your Will is structured to maximise allowances, especially given the new cap on BPR and APR and its “use-it-or-lose-it” nature for spouses and civil partners.
• Accelerating lifetime gifts: given the potential for changes to the gifting rules, consider making gifts sooner rather than later to start the seven-year clock under the current, more lenient regime.
• Reassessing your pension strategy: consider spending pension funds first, or other strategies to reduce the impact of the April 2027 changes.
• Reviewing the tax exposure of any family trusts: the new cap on reliefs will significantly affect both existing and new trusts.
• Assess Investments: such as AIM shares, which may currently qualify for BPR, are also worth looking at.

There is no ‘one size fits all’ solution though, and whether or not any of the above will help you depends on your precise circumstances.

We’re here to help

Given the complexity of the confirmed and potential changes, we’d would urge you to seek professional advice now, rather than let a potential tax saving slip you by.

To find out more about how we can support your Inheritance Tax planning, speak to one of our specialist team by calling 0330 058 6559 or email hello@scruttonbland.co.uk