Understanding Inheritance Tax Changes in 2027
In the next year some huge changes are coming your way.
When we think about our legacy, we imagine the home we’ve worked decades to pay off, the savings we’ve carefully built and the financial security we want to leave behind for our children and grandchildren. But there is an often-overlooked guest at this table, His Majesty’s Revenue and Customs (HMRC).
Inheritance Tax (IHT) is sometimes called the “most hated tax in Britain,” yet many people don’t fully understand what it is, who pays it, or crucially that there are legitimate ways to reduce or even eliminate it entirely.
With tax thresholds remaining frozen and property values continuing to rise, more families than ever are finding themselves caught in the inheritance tax net. We hope to demystify this important topic.
What Exactly Is Inheritance Tax?
Think of Inheritance Tax as a charge on your estate when you pass away. Your “estate” is everything you own, your home, savings, investments, personal possessions and even your car, minus any debts you owe.
Here’s the crucial point many people miss: you don’t pay Inheritance Tax. Your beneficiaries do.
When you die, it’s your loved ones, your children, grandchildren, or whoever inherits from you that face this tax bill before they can receive what you’ve left them. It’s paid from your estate before anything is distributed, which means they receive less than you might have intended.
When Does Inheritance Tax Apply?
Currently, Inheritance Tax is charged at 40% on the value of your estate above certain thresholds. Yes, you read that correctly 40 pence in every pound over the threshold goes to HMRC, not to your family.
The main threshold, called the “nil-rate band,” stands at £325,000 per person for the 2025/26 tax year. This threshold has been frozen since 2009 and is set to remain frozen until at least April 2030. If your estate is worth less than this, there’s typically no Inheritance Tax to pay.
However, there’s also an additional “residence nil-rate band” of £175,000 if you’re leaving your main home to direct descendants (children or grandchildren). This threshold has been frozen since April 2020 and is also set to remain frozen until April 2030. This means an individual could potentially pass on up to £500,000 tax-free if leaving a home to their children.
For married couples and civil partners, things get even better. When the first partner dies, their unused allowances can be transferred to the surviving spouse, potentially creating a combined threshold of up to £1 million. This means a couple could pass on their family home and savings worth up to this amount without their children paying a penny in Inheritance Tax.
A Real-World Example
Let’s say Margaret and John own their home worth £450,000 and have savings of £300,000. Their total estate is £750,000.
If they do no planning and both pass away, their estate would face Inheritance Tax on the amount over £1 million (assuming full allowances are available). In this case: no tax is due because £750,000 is below the £1 million threshold.
But now imagine their home is worth £600,000 and they have £500,000 in savings – a total estate of £1.1 million. The amount over £1 million (£100,000) would be taxed at 40%, meaning their children would pay £40,000 to HMRC before inheriting anything.
That’s £40,000 less for their children, grandchildren, or the charities they care about.
The Growing Problem
In April 2027, Inheritance Tax will affect more families than ever, the nil-rate band has been frozen at £325,000 since 2009 and the residence nil-rate band has been frozen at £175,000 since 2020. Both thresholds are set to remain frozen until at least April 2030.
That’s over 20 years of frozen thresholds for the main nil-rate band. Meanwhile, house prices and the value of investments have continued to rise substantially.
What might have been comfortably below the threshold a decade ago could now push your estate into the taxable zone, not because you’ve become wealthier, but simply because property values have increased whilst the thresholds have remained static. This phenomenon, known as “fiscal drag,” is pulling more and more ordinary families into the inheritance tax net.
But the real problem comes when pensions are moved into your estate from April 2027. Between your house value and your unused pension value you may find you are already over the threshold. Many loved ones will have to pay this tax. Some spousal exemptions apply.
How Financial Planning Options Can Help
The good news? Inheritance Tax is often described as a “voluntary tax” by financial planners because there are so many legitimate ways to reduce or eliminate it. You’ve worked hard for your money ensuring more of it goes to your loved ones rather than the taxman is simply smart planning. But this take time so there earlier you think about it the better.
1. Gifting During Your Lifetime
You can give away £3,000 each tax year without it counting towards your estate (known as your “annual exemption”). If you didn’t use last year’s allowance, you can carry it forward one year, giving you up to £6,000 to gift tax-free. You can also make small gifts of up to £250 to as many people as you like (as long as you haven’t used another exemption on them), and give unlimited gifts for weddings (£5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else).
You can also make regular gifts from your income (not capital) that won’t count towards your estate, provided they don’t affect your standard of living.
Even larger gifts become exempt from Inheritance Tax if you live for seven years after making them, these are called “potentially exempt transfers.” If you pass away within seven years, the gift may be subject to tax on a sliding scale (known as “taper relief”).
The key is planning early. Money you give away today not only reduces your taxable estate but can also help your children when they need it most, perhaps for a house deposit or during their working years, rather than when they’re in their sixties themselves.
2. Life Insurance in Trust
A life insurance policy written “in trust” can provide a tax-free lump sum to your beneficiaries that sits outside your estate. This can provide the funds to pay any Inheritance Tax bill, ensuring your family doesn’t need to sell assets (like the family home) to pay the tax.
3. Pension Planning
This is a game-changer that many people don’t realise, pensions have traditionally been outside your estate for Inheritance Tax purposes. Unlike ISAs or other savings, the money in your pension can pass to your beneficiaries tax-efficiently.
If you die before age 75, your pension can usually be inherited completely tax-free by your beneficiaries. Even after 75, whilst beneficiaries pay income tax at their own rate when they draw the money out, there has been no 40% Inheritance Tax charge.
Important update: The government announced in the Budget October 2024, (confirmed in legislation by HMRC in November 2025) that from April 2027, unused pension funds will be brought into the scope of Inheritance Tax. This is a significant change that makes pension planning even more time-sensitive.
Despite this change, pensions remain a highly tax-efficient wealth transfer tool, particularly if death occurs before age 75. If you have a substantial pension fund, seeking advice before April 2027 could save your beneficiaries tax.
4. Trust Structures
Trusts sound complicated, but they’re simply a legal arrangement where you place assets for the benefit of others. Properly structured trusts can remove assets from your estate while giving you flexibility and control during your lifetime.
5. Business Relief and Agricultural Relief
If you own a business or farm, there may be significant reliefs available that can reduce your Inheritance Tax to zero on these assets.
6. Charitable Giving
Leaving at least 10% of your net estate to charity can reduce the Inheritance Tax rate from 40% to 36% on the remainder. Plus, charitable gifts are exempt from Inheritance Tax entirely, so you can leave a lasting legacy while reducing the tax burden on your family.
Why This Matters Now
Many people put off thinking about Inheritance Tax because it feels morbid or because they assume it only affects the very wealthy. But with property prices where they are and thresholds frozen until at least 2030, many ordinary families now find themselves in the Inheritance Tax bracket.
Moreover, effective Inheritance Tax planning often requires time. The seven-year rule for gifts, for example, means the earlier you start planning, the more options you have.
Critical upcoming changes: With pensions being brought into the Inheritance Tax net from April 2027, there’s a narrowing window to take advantage of current rules. Action taken now could save your beneficiaries tens or hundreds of thousands of pounds.
The Family Conversation
One of the most valuable things you can do is talk to your family about your plans. Often you are worrying about the burden of your care home fees on your loved ones. So want to keep money in reserve. But others worry about burdening their children with Inheritance tax. If they understood your wishes and could plan accordingly, rather than facing difficult decisions and a significant tax bill during an already emotional time, wouldn’t that be better?
Take Action Today
Inheritance Tax planning isn’t about dodging responsibility, it’s about ensuring your hard-earned assets benefit the people and causes you care about, not just HMRC.
The strategies available are entirely legitimate and when done correctly, can save your family tens or even hundreds of thousands of pounds. But they require professional advice tailored to your specific circumstances.
Every estate is different. Your family situation, the composition of your assets, your age, health and your wishes all play a part in determining the right strategy for you.
This is where expert financial planning makes all the difference. A Certified Financial Planner can review your situation, explain your options in plain English and implement strategies that work for you, all while ensuring you maintain the flexibility and security you need during your lifetime.
Your Next Step
Don’t let Inheritance Tax be the dark cloud over your legacy. The planning you do today could mean your children inherit hundreds of thousands of pounds more than they otherwise would.
Your legacy deserves protecting. Start that conversation today.
We expect our financial planners to be extremely busy over the next 12 months in the run up to this change.
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BE AWARE
This information is for guidance only and does not constitute regulated financial advice. To ensure you have personalised advice for your particular set of circumstances, you must make an appointment and speak to one of our professional advisers. Please note these services are chargeable. The facts in this article were correct at time of writing, but you may be reading it in the future. Always check rates and allowances before taking action or speak to a qualified financial planner. All investments carry an element of risk, they can fall as well as rise and you may not get back what you pay in. Errors & omissions excepted.
For the most current rates, thresholds and regulations, please visit www.gov.uk
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