Rachel Reeves, the UK Chancellor of the Exchequer, has implemented significant reforms to inheritance tax (IHT), most notably bringing inherited pension funds into the scope of IHT from April 2027 and capping 100% agricultural and business property reliefs at £1 million starting in April 2026. These measures are designed to raise approximately £2 billion annually as part of a broader strategy to stabilize public finances and fund essential services.
Under the new rules, the standard nil-rate band remains frozen at £325,000 until 2030, meaning more estates will likely fall into the tax bracket due to rising asset values—a process often referred to as “fiscal drag.” In this guide, you will learn about the specific timeline for these changes, the impact on family farms and private businesses, and how the inclusion of pension pots fundamentally alters long-term estate planning for millions of UK residents.
Threshold Freezes and Fiscal Drag
The core of the current inheritance tax framework remains the “Nil-Rate Band,” which is the value of an estate that can be passed on without incurring tax. Under Rachel Reeves’ 2024 and 2025 fiscal plans, these thresholds have been frozen rather than increased in line with inflation.
The £325,000 Nil-Rate Band
The standard threshold has been set at £325,000 since 2009 and is now officially extended until April 2030. This means that as property prices and inflation rise, a larger percentage of the population will naturally exceed this limit, subjecting their estates to a 40% tax rate on the excess.
Residence Nil-Rate Band (RNRB)
The additional £175,000 allowance for those passing a primary residence to direct descendants is also frozen until 2030. When combined, a married couple can pass on up to £1 million tax-free, but this figure is becoming easier to reach for middle-income families in high-value areas like London and the South East.
The 2027 Pension Tax Revolution
Perhaps the most significant change introduced by Reeves is the removal of the IHT exemption for unused pension funds. For decades, pensions were a primary tool for “wealth cascading” because they sat outside the taxable estate.
Ending the Exemption
Starting April 6, 2027, pension pots will be added to the total value of an estate for IHT calculations. This change targets what the Treasury describes as a “loophole” that allows wealthy individuals to live off other assets while leaving their pensions untouched to pass on tax-free.
Impact on Beneficiaries
Beneficiaries may face a double tax hit: inheritance tax on the pot itself (at 40%) and potentially income tax when they draw money from the inherited pension. Financial advisors suggest this will lead to a surge in individuals “spending their pension first” to minimize the future tax burden.
Agricultural and Business Relief Caps
Historically, family farms and private trading businesses enjoyed 100% relief from inheritance tax to prevent them from being broken up upon the death of an owner. The new reforms introduce a restrictive cap on these benefits.
The £1 Million Cap
From April 2026, 100% relief will only apply to the first £1 million of combined agricultural and business assets. For any value exceeding this threshold, the relief drops to 50%, resulting in an effective tax rate of 20% on the surplus.
Pressure on Family Farms
Agricultural Property Relief (APR) changes have sparked significant debate, with critics arguing that a £1 million cap is insufficient for modern farming enterprises where land and equipment values are high but cash flow is low. The government maintains that 75% of APR claims will remain unaffected by the change.
Gifting Rules and Taper Relief
The “7-year rule” remains a cornerstone of IHT planning, allowing individuals to give away assets that become exempt if the donor survives for seven years. While there has been speculation about extending this to ten years, no such change was confirmed in the recent budgets.
Potentially Exempt Transfers (PETs)
Gifts made more than seven years before death are still entirely tax-free. If death occurs within three to seven years, “taper relief” applies, gradually reducing the tax rate from 40% down to 8% depending on the duration of survival.
Lifetime Gift Allowances
As of early 2026, the annual gift allowance remains at £3,000 per person. Any gifts exceeding this, and not covered by other exemptions (like wedding gifts or regular out-of-income gifts), are tracked as PETs and could be subject to tax if the donor dies within the seven-year window.
Impact on the “AIM” Market
The Alternative Investment Market (AIM) has long been a popular destination for IHT planning because shares in qualifying companies were eligible for 100% Business Property Relief after being held for two years.
Halving the Relief
Reeves has reduced the relief on AIM shares to 50%, creating an effective tax rate of 20% on these investments upon death. This move was designed to reduce the “distortion” of capital toward tax-haven investments within the UK stock market.
Market Reaction
Since the announcement, some analysts have noted a shift in investor behavior, with a flight toward more traditional diverse portfolios, as the tax advantage of AIM shares has been significantly diluted.
Practical Information and Planning
Navigating the new inheritance tax landscape requires early action and a clear understanding of the new timelines. Managing an estate effectively now involves looking at pension drawdowns and life insurance options.
- Key Effective Dates: April 2026 (APR/BPR changes) and April 2027 (Pension changes).
- Tax Rate: 40% standard rate, 20% for qualifying business/farm assets over £1m.
- Reporting: Executors must report the estate value to HMRC within 6 months of death.
- Payment: Tax must usually be paid within 6 months of the end of the month of death.
- What to Expect: Increased scrutiny of “regular gifts from income” and pension pot valuations.
Frequently Asked Questions
When do the Rachel Reeves inheritance tax changes start?
The changes to Agricultural and Business Property Relief begin in April 2026. The inclusion of pensions in taxable estates takes effect from April 6, 2027.
Will my pension be taxed at 40% when I die?
If your total estate (including your pension) exceeds your available nil-rate bands, the portion of the pension over the threshold will be taxed at 40% starting in April 2027.
Is the 7-year rule still in place?
Yes, the 7-year rule for “potentially exempt transfers” remains unchanged as of 2026, though it remains a subject of speculation for future budgets.
How much can a married couple pass on tax-free?
Currently, a married couple can pass on up to £1 million tax-free (2x £325k nil-rate bands plus 2x £175k residence bands), provided they are passing their main home to children or grandchildren.
What is the “Farm Tax” everyone is talking about?
This refers to the new £1 million cap on 100% Agricultural Property Relief. Farms worth over £1 million will pay an effective 20% tax on the value above that limit.
Can I still give away £3,000 a year?
Yes, the £3,000 annual exemption remains in place, allowing you to give away this amount each year without it being added back into your estate for tax purposes.
Will the nil-rate band ever increase?
It is currently frozen at £325,000 until at least April 2030, which means no increases are expected for the remainder of the decade.
Does life insurance count toward inheritance tax?
If a life insurance policy is “written in trust,” the payout usually goes directly to the beneficiaries and is not counted as part of the taxable estate.
How do the new rules affect AIM shares?
The relief has been reduced from 100% to 50%, meaning you will pay a 20% tax rate on inherited AIM shares held for at least two years.
Can I avoid the new pension tax by withdrawing the money now?
Withdrawing a large lump sum may trigger immediate income tax at your marginal rate. You should consult a financial advisor to compare the cost of current income tax versus future inheritance tax.
What happens if I can’t afford the tax on a farm?
The government allows inheritance tax on certain assets, like land and businesses, to be paid in equal installments over 10 years, sometimes interest-free.
Final Thoughts
The Rachel Reeves inheritance tax reforms represent a fundamental shift in how wealth is preserved and transferred across generations in the United Kingdom. By integrating unused pension pots into the taxable estate and placing strict limits on traditional business and agricultural reliefs, the government has moved to close decades-old avenues for tax-efficient wealth cascading. While the headline tax rate remains at 40%, the practical impact of frozen thresholds—combined with the introduction of the 20% effective rate on large farms and businesses—means that “fiscal drag” will pull an increasing number of middle-income and asset-rich families into the IHT net by 2030.
For individuals and families, the priority has shifted from simple “death tax” avoidance to active, long-term financial management. The 2027 inclusion of pensions, in particular, upends the traditional advice of “spend the ISA, save the pension,” forcing a total reassessment of retirement drawdown strategies. As these rules take effect between 2026 and 2027, the value of early professional advice and the strategic use of gifting, trusts, and life insurance has never been higher. Navigating this new landscape requires a proactive approach to ensure that a lifetime of hard work translates into a secure legacy rather than an unexpected fiscal burden for the next generation.
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