While estate planning can often be overlooked, it is one of the most important steps families can take to ensure assets are managed and distributed according to their wishes.
As Inheritance Tax (IHT) laws in the UK become increasingly complex, many families are struggling to keep up with the changes. Recent and upcoming reforms pull more assets into the taxable pool of IHT.
The addition of a Business/Agriculture Property (BPR/APR) relief cap, alongside the inclusion of unspent pensions into the taxable assets of an estate, can significantly increase IHT liabilities.
With the value of assets also on the rise, more estates are being drawn into the IHT net, which might lead to heftier tax bills without the right estate planning in place.
Tax-free allowances explained
An important consideration during the estate planning process is how to pass on assets while minimising IHT exposure.
Each person in the UK has a nil-rate IHT band exemption of £325,000, meaning that assets beneath this threshold are generally exempt from IHT.
However, anything over this threshold is taxed at 40 per cent.
As the death of the first spouse does not trigger IHT charges, full ownership of an estate can be passed to a surviving spouse completely tax free.
Any unused nil-rate band allowance can also be transferred to the surviving spouse, potentially increasing an available allowance to £650,000 to be used on the death of the second spouse.
Where property is left to direct descendants, this can unlock an extra £175,000 tax-free allowance per person through the residence nil-rate band (RNRB).
Together, the theoretical maximum tax-free allowance is £500,000 per person, or £1m between spouses.
Addition of a BPR/APR cap
The BPR/APR cap, announced in the 2024 Autumn Budget, came into effect in April 2026.
Where business and agricultural assets were once able to be passed between generations completely tax free, there is now a capped tax-exempt allowance.
Any assets that exceed £2.5 million will only receive 50 per cent of the tax relief, thereby subjecting them to a 20 per cent IHT charge.
Relief allowances can be transferred between spouses, with a maximum combined relief of £5m.
If families wish to pass their business assets between generations, they should review their succession plans carefully.
Options may include restructuring business ownership, making greater use of spousal exemptions and considering trust-based structures where appropriate.
Changes to unspent pensions
Another major change will affect many retirees and those with substantial pension savings.
Pension funds and death benefits are set to be included in the value of your estate, from 6 April 2027.
While pensions currently sit outside the taxable estate and aren’t impacted by IHT, the reforms mean unspent pensions over the nil-rate band will be taxed.
Unused pension can be passed to a surviving spouse without tax, but the leftover funds from a second death might then be subject to the 40 per cent rate.
These new rules might require a total re-evaluation of your approach to investing, retirement spending and tax-free gifting.
Reviewing how and when you draw your pension and what to gift during your lifetime can be the difference between passing assets on tax free and leaving your family with a steep tax bill.
The cost of not planning
As IHT nil-rate bands are frozen until 2031, estates are silently pushed towards paying more tax.
Inheritance tax receipts have reached a record £2.3bn for April to June 2026, up by £96m from the same period last year.
House prices have steadily increased over the past few years, with a house bought in 2020 worth an average of 22 per cent more in 2026.
More families are becoming exposed to IHT as property values rise, tax thresholds remain rigid, pensions are brought into scope and IHT relief for businesses and agricultural assets are reduced.
This can result in a double IHT blow to estates.
The combined effect of rising asset values and reduced IHT reliefs mean some families could face liabilities they may not have originally planned for.
Speaking to a solicitor
At Meaby & Co, we provide professional estate planning services that are shaped around your needs.
We can review the structure of your estate and identify ways to mitigate tax liabilities, draft and update Wills and advise on whether trusts could help protect family wealth.
Our experts can help you assess the impact of pensions being brought into estates and help families maintain continuity of businesses while managing IHT exposure.
Whether you have had a change of circumstances or wish to update your existing estate planning arrangements, please contact Meaby & Co today.
