Inheritance Tax (IHT)

Prior to 6 April 2025, the extent to which someone was subject to IHT depended on their country of domicile. Broadly, ‘domicile’ means one’s country of ‘natural or permanent home’.

Finance Act 2025 changed this, such that the scope of IHT now depends on whether or not you are a ‘long-term resident’ (LTR), i.e. an individual who has been UK resident for at least 10 out of the previous 20 tax years.

• Individuals who are LTR in the UK are subject to IHT on their worldwide assets.
• In contrast, non-LTRs are subject to IHT on their UK assets only.

For a LTR individual who has left the UK, the number of years for which their non-UK assets will remain within the scope of UK IHT will depend on how many years they were resident prior to departure.

• If they were resident for 13 years or less, the number of years is 3;
• For every additional year, one year is added to the number of years (up to a maximum of 10 years).

So, say, someone who had been resident for 17 years would remain within scope on their worldwide assets for 7 years.

Tax rates
IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB). The NRB is £325,000 for 2025/26.

Unused NRB on death can be transferred to a spouse, so couples can currently have a combined NRB of up to £650,000 on the second death. In addition, a ‘residence NRB’ (RNRB) is available in respect of a property that:
1. At some point has been the deceased’s main residence; and
2. Is passed on death to a direct descendant (or their spouse).

• For 2025/26, the RNRB is £175,000.

• If unused, this relief will also be transferable to the deceased’s spouse.

• The RNRB will be progressively reduced where estates are over £2 million in size (before reliefs and exemptions), such that estates over £2.35m receive no benefit from the RNRB.

• If an estate does not qualify for a full residence NRB, it may be entitled to a further relief, known as a ‘downsizing addition’, if three conditions apply:
1. The deceased disposed of a home on or after 8 July 2015 and either downsized to a less valuable property or ceased to own a home.
2. The former home would have qualified for the residence NRB if it had been retained.
3. At least some of the deceased’s estate is inherited by their direct descendants or the spouses thereof.

Tax planning points
• Consider gifting assets during your lifetime to minimise the IHT payable on your death.
– Such gifts will fall outside the IHT net after seven years, provided you do not reserve a benefit in the asset transferred.
– After three years, the amount of IHT potentially payable on the gift (should you die within seven years of making it) is reduced, based on how long you survive.
– The gifting of assets can give rise to CGT liabilities, but some assets are exempt CGT (e.g. cash and gilts).

• If you have income surplus to your normal living expenses, consider making use of the IHT exemption for regular gifts out of surplus income.
– Such gifts are tax-free, even where death occurs within seven years.
– Appropriate documentation should be retained to show that the gift is regular and made from income not required by the donor to cover their living expenses.

• Make use of other IHT reliefs and exemptions.
– The annual exemption of £3,000 (£6,000 if no gifts were made during 2024/25);
– The small gifts exemption of £250 per donee p.a.; and
– Gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren and £1,000 to anyone else).

• Consider taking out life insurance to fund any contingent exposure to IHT.

• If you sell your home (e.g. to move into care or downsize), keep records of the transactions, so that on your death the downsizing addition may potentially be claimed.

Agricultural and business property
Since 1992, qualifying agricultural and business property has had 100% relief from IHT. From 6 April 2026, this 100% relief will be restricted to the first £2.5m of qualifying property, with any excess attracting 50% relief.

Also from 6 April 2026, the 100% business relief for qualifying shares quoted on the Alternative Investment Market (AIM) or other ‘unlisted’ markets is reduced to 50%, with no part of the value eligible for 100% relief.

These changes could potentially create significant IHT liabilities for family farming and trading businesses in the future, including where business assets are held in trust.

Tax planning points
• All businesses should consider their IHT position, including:
• reviewing wills; and
• considering whether some lifetime gifts of qualifying property may be worthwhile.

IHT and pensions
The Autumn 2025 Finance Bill contains major changes to the IHT rules for both unused pension funds at death and certain pension death benefits.

Currently, it is standard IHT planning to write death benefits payable from pension schemes, such as personal pensions, into trust for one or more nominated beneficiaries (usually family members).

Under current rules, this puts them outside the IHT net if the policy holder dies.

This IHT exemption is being abolished from 6 April 2027. This may alter how you should plan for your retirement.

Tax planning points
Make sure you get specialist advice, as the interaction of the IHT and income tax rules on pensions is complex. However, planning strategies
may include:

• Draw tax-free cash (if available) and gift it;
• Draw down additional income to fund gifting to the next generation; and
– paying income tax;
– and gifting to the next generation using the normal expenditure from income exemption.
– This will work better where the income is taxed at a rate which is lower than the 40% IHT rate.

• Review arrangements to see if an expression of wishes in favour of a spouse is appropriate for death benefits; and
• Make provision for IHT by effecting a life policy in trust for the beneficiaries who will suffer the charge.

Most importantly of all, make sure you have an up-to-date will, which is not only efficient from an IHT perspective but also distributes your assets based on your current family circumstances. For example, trusts that were due to be set up in your will while your children were minors may no longer be needed.