Inheritance Tax 2025: What UK Families Need to Know About Recent Changes

As of 6 April 2025, the UK government introduced significant reforms to the Inheritance Tax (IHT) system, affecting estate planning and taxation for UK residents. These changes are intended to modernise the IHT framework, ensure fairness, and capture a broader range of assets.

1. Transition to Residency-Based Taxation

Previously, IHT liability was primarily determined by an individual's domicile status. From April 2025, the UK has adopted a residency-based approach. Long-term UK residents—defined as individuals who have been UK tax residents for 10 consecutive years or 10 years within the last 20—may now be liable to IHT on their worldwide assets. Even if such individuals leave the UK, overseas assets may remain subject to IHT for up to 10 years, depending on the period of UK residency. This change represents a fundamental shift for high-net-worth individuals with international holdings. (haysmac.com)

2. Inclusion of Pension Funds in IHT from April 2027

From April 2027, unused pension funds will be included in IHT calculations upon an individual's death, irrespective of the pension holder's age at death. Previously, pensions were generally exempt from IHT, making this a significant consideration for retirement and estate planning. The government has emphasised that this measure ensures pensions are used primarily for retirement income rather than wealth transfer. (ft.com)

3. Potential Reforms to Lifetime Gifts and the Seven-Year Rule

Currently, the 'seven-year rule' allows individuals to make lifetime gifts that are exempt from IHT if the donor survives for seven years after making the gift. Proposed reforms may reduce this exemption period or introduce caps on tax-free gifts, potentially affecting estate planning strategies. Estate owners should consider the timing and value of gifts carefully to optimise tax efficiency. (swgroup.com)

4. Agricultural and Business Property Relief Adjustments

From April 2026, reliefs for agricultural and business property will be reduced. Estates with farms or businesses valued over £1 million may be liable to a 20% IHT rate upon transfer. This change could significantly affect family-run businesses and agricultural estates, highlighting the need for early planning. (theguardian.com)

5. Strategic Considerations for Estate Planning

Given these developments, it is essential to review estate planning strategies. Measures such as trusts, lifetime gifting, and careful timing of asset transfers can mitigate IHT liabilities. Professional advice is crucial to navigate complex rules and avoid unintended tax consequences, particularly under the new residency-based and pension-inclusive regime.

The 2025 reforms to the UK Inheritance Tax system represent a significant shift in estate taxation. Individuals and families should proactively seek expert guidance to ensure their estate planning aligns with the new rules. Early, informed planning can minimise potential tax liabilities and safeguard the transfer of wealth according to personal wishes.