Market background
Table of contents
Broadly, Inheritance Tax (IHT) is payable on the taxable value of a person’s estate above the tax-free allowance known as the ‘nil-rate band’ (NRB). The standard rate of IHT is 40%.
Estate allowances
The NRB is the threshold up to which a person’s estate will be free of IHT. This has been frozen at £325,000 since 2009, and will remain so until at least 2031, as will the Residence NRB - an additional allowance of £175,000 if the family home is left to direct or lineal descendants1.
With allowances frozen but asset values (e.g. house prices and stock markets) continuing to rise, more people are inevitably being dragged into the IHT net. Since 2009 IHT receipts have more than tripled to £8.25bn in 2024/251, and are forecast to reach £14.7bn by 20312.
Lifetime gift exemptions
IHT can also apply to gifts or ‘transfers of value’ made during a person’s lifetime, with certain exemptions:
- Spouses or civil partners: unlimited (if both are ‘Long-Term Resident’)
- Annual exemption: £3,000 per year
- Small gift allowance: £250 per year
- Wedding gifts: £5,000 for a child, £2,500 for a grandchild, £1,000 for anyone else
- ‘Normal expenditure out of income (NEOI)’: unlimited
The NEOI exemption relates to payments that:
- Are paid out of the donor’s net income
- Form part of their normal spending pattern, and
- Don’t compromise their standard of living
This exemption is key with respect to wealth protection, as it will typically include life insurance premiums provided they meet that criteria (for example aren’t paid from encashment of investments).
Key IHT reforms
Three reforms were announced in the Autumn Budget 2024 which are significantly changing the landscape for IHT planning and are expected to account for around 14% of IHT receipts by 20312.
1. Scrapping of the domicile regime
The former domicile-based tax regime was replaced with a new residency-based regime on 6th April 2025. Non-domiciled individuals (‘non-doms) were only liable to IHT on their UK assets, unlike UK-domiciled individuals who were liable to IHT on their worldwide assets.
A former ‘non-dom’ who has been UK resident for at least 10 of the previous 20 tax years is now classed as ‘Long-Term Resident’ (LTR), and is therefore liable to IHT on their worldwide assets, not just their UK assets as was previously the case.
LTRs who permanently leave the UK will carry a ‘tail’ of IHT liability with them, the length of which will depend on how many of the previous tax years they were UK resident:
| Number of years UK tax resident | Length of IHT tail |
|---|---|
| 10-13 | 3 years |
| 14 | 4 years |
| 15 | 5 years |
| 16 | 6 years |
| 17 | 7 years |
| 18 | 8 years |
| 19 | 9 years |
| 20 | 10 years |
Transfers between LTR spouses or civil partners are exempt from IHT, as are those from a non-LTR spouse or civil partner to a LTR spouse or civil partner, but transfers from a LTR spouse or civil partner to a non-LTR spouse or civil partner are only exempt up to £325,000.
2. Agricultural Relief (AR) and Business Relief (BR)
Prior to 6th April 2026 100% IHT relief was afforded on transfers (either following a person’s death or during their lifetime) of all qualifying agricultural and business assets after they had been held for a certain period of time:
| Qualifying assets | Qualifying period | |
|---|---|---|
| Agricultural relief | The value of land occupied for purpose of agriculture, plus buildings or farmhouses (but not farm equipment, machinery, derelict buildings, harvested crops or livestock) | 2 years if the land was occupied by the owner, or 7 years if it was occupied by someone else |
| Business relief | A business or an interest in a business, shares in unquoted companies and shares listed on the Alternative Investment Market (AIM) | 2 years |
However, since 6th April 2026 only the first £2.5m of combined agricultural/business assets receives 100% relief, with 50% relief thereafter. Furthermore, all quoted shares not listed on a recognised stock exchange such as AIM only receive 50% relief, regardless of value.
In addition to business and farm owners this will impact BR qualifying investments - popular vehicles for older people wanting to get funds out of their estate as quickly as possible. This is explained further on the IHT planning with protection page.
The £2.5m allowance is per person, and any unused allowance is transferrable between spouses/civil partners as is the case with the NRB.
3. Inherited pensions & death benefits
Currently most unused pension funds can be inherited free of IHT, but from 6th April 2027 they will be included in the value of an estate and therefore liable to IHT. This includes most pension death benefits, though not ‘death-in-service’ benefits or dependents pensions.
The government estimated that 49,000 estates will immediately have either a new or increased IHT liability as a result of these changes, but many younger people who are still growing their pension can also expect to be drawn into the net in future3.
Following significant public criticism regarding the impracticality of being able to report on let alone pay IHT on inherited pensions, certain provisions were announced in the Autumn 2025 budget. This is explained further on the IHT planning with protection page.
Looking for something else?
IHT planning with protection
A comprehensive analysis of the life insurance solutions available for protecting clients’ wealth, providing liquidity and certainty for IHT liabilities.
Products and underwriting
Understand how the key wealth protection products can be used for covering IHT liabilities, and the flexible underwriting options available to meet client needs.