2027 Inheritance Tax Changes: What You Need to Know
Inheritance Tax has become one of the biggest tax planning topics we are discussing with clients at the moment.
Historically, many people viewed Inheritance Tax as something that only affected the very wealthy – but that’s not always the case.
With so much changing, like property values increasing, pension pots growing, tax thresholds remaining frozen and changes being introduced to pensions, more families are being brought into the scope of Inheritance Tax than they may realise.
For some people, there may be no issue at all. But for others, failing to plan early could leave their loved ones facing a significant tax bill at an already difficult time.
What is Inheritance Tax?
Inheritance Tax is a tax that can be payable when someone dies.
It is calculated based on the value of their estate. Generally, an Estate includes everything someone owns when they pass away, such as:
- Their home
- Rental properties
- Cash in the bank
- Investments
- Business assets
- Vehicles
- Personal possessions
- Pensions, depending on the rules at the time
The standard rate of Inheritance Tax is 40% on the value of the estate above the available tax-free thresholds and reliefs. That means it can become a very significant tax if it has not been considered properly.
Why are more people talking about Inheritance Tax?
One of the main reasons Inheritance Tax is becoming more relevant is because the tax-free thresholds have not kept pace with asset values.
Each individual currently has a nil-rate band of £325,000. This is the amount that can usually be passed on before Inheritance Tax is payable.
There is also a residence nil-rate band of up to £175,000 where a qualifying main residence is left to direct descendants, such as children or grandchildren.
In the right circumstances, this can mean an individual may be able to pass on up to £500,000 tax-free. For married couples and civil partners, unused allowances can often be transferred, so a couple may be able to pass on up to £1 million before Inheritance Tax is due.
However, there is some detail behind this.
The residence nil-rate band only applies in certain circumstances. It must usually relate to a main residence being passed to direct descendants. It can also be reduced where the total estate exceeds £2 million.
So while the “£1 million tax-free” figure is often quoted, not every estate will qualify for the full amount.
Property values are creating an issue
For a lot of families, the main asset in the estate is the family home.
In areas where house prices have increased significantly over the years, people may now have estates worth far more than they expected – even if they do not feel particularly wealthy.
This is why Inheritance Tax is no longer something that should only be considered by very high-net-worth families.
A person may have a valuable home, a pension, some savings and perhaps an investment property, and suddenly their estate could be exposed to Inheritance Tax.
The problem is often only discovered when someone passes away, at which it is too late to carry out any effective planning.
The pension change from April 2027
One of the most important changes is the planned treatment of pensions from April 2027.
Pensions have historically been a very useful tool for tax and estate planning. In many cases, unused pension pots have sat outside the estate for Inheritance Tax purposes.
From 6 April 2027, most unused pension funds and death benefits are expected to be brought within the scope of Inheritance Tax.
This is a major change.
For people who have built up significant pension savings, it could increase the value of their taxable estate. It may also push some estates above the £2 million threshold, which can then reduce or remove the residence nil-rate band.
There’s also a further practical issue: If a pension suffers Inheritance Tax and then the beneficiary later draws funds from that pension, there may also be Income Tax to consider.
This does not mean pensions are no longer useful. They remain extremely important for retirement planning. But it does mean that pension planning and estate planning now need to be considered together.
Gifting assets: useful, but not always simple
A common question we hear is:
“Can I just give assets away during my lifetime?”
The answer is that gifting can be very effective but it needs to be done properly.
Many lifetime gifts are known as potentially exempt transfers (PETs). If you make a gift and survive seven years, that gift will usually fall outside your estate for Inheritance Tax purposes.
If you die within seven years, the gift may still be included in the Inheritance Tax calculation.
There can be tapering of the tax rate after three years, but the seven-year rule is still the key point most people need to understand.
This is why early planning is so important. Leaving everything until later in life can reduce the options available.
Be careful when gifting property
Gifting cash can be relatively straightforward.
Gifting property is more complicated.
For example, if you own a rental property that’s increased in value, gifting it to a family member could trigger Capital Gains Tax based on its market value. This can happen even if no money changes hands.
So while the gift may help with Inheritance Tax planning in the long term, it could create an immediate Capital Gains Tax bill.
It is important to consider all taxes together – a plan that reduces Inheritance Tax may not be sensible if it creates a large tax cost elsewhere.
Can you gift your home and keep living in it?
This is another common question.
In simple terms, you cannot usually give your home away and continue living in it rent-free while expecting it to fall outside your estate for Inheritance Tax.
This is known as a gift with reservation of benefit.
If you gift your home to your children but continue to live in it without paying a proper market rent, HMRC may treat the property as still forming part of your estate.
To make this type of planning work, you would usually need to either move out or pay a genuine market rent. That rent would need to be reviewed and properly documented.
Understandably, this is not attractive to most people. You have given your home away but then still need to pay rent to live in it.
Again, it highlights why advice is important before taking action.
Changes for business owners and farmers
Inheritance Tax planning is also changing for business owners and farming families.
Business Property Relief and Agricultural Property Relief have historically provided valuable relief from Inheritance Tax, often at 100% where the relevant conditions are met.
From April 2026, the rules changed.
A 100% relief allowance now applies to the combined value of qualifying agricultural and business property, with the allowance now set at £2.5 million per individual. For married couples and civil partners, this can potentially mean up to £5 million of qualifying assets can receive 100% relief.
Above that, qualifying assets will generally receive 50% relief, meaning an effective Inheritance Tax rate of 20% on the excess value.
For farming businesses and family-owned companies this can create a real issue.
These businesses may be asset-rich but cash-poor. A farm may have valuable land and machinery but not have the cash available to pay an Inheritance Tax bill. A family business may be valuable on paper but still need its premises, equipment and working capital to continue trading.
In some cases, families may need to consider whether assets would have to be sold, whether borrowing would be required or whether succession planning needs to be revisited.
Planning needs to be personal
There is no single Inheritance Tax solution that works for everyone.
For some families, the answer may be simple gifting.
For others, it may involve reviewing wills, pension nominations, life insurance, business structures, trusts, property ownership or succession plans.
Trusts can be useful in some circumstances, but they are not a magic solution. They come with their own tax rules, reporting requirements and potential charges.
Similarly, transferring assets into a business or changing the ownership of assets may help in some cases, but it needs to be considered carefully.
Good planning starts with understanding the full picture.
That means looking at:
- The value of your estate
- Your home and how it is owned
- Your pension position
- Any business or farming assets
- Investment properties
- Your will
- Your family circumstances
- Your income needs in later life
- The tax impact of making gifts
- What your family would actually do if a tax bill arose
Do not leave the conversation too late
Inheritance Tax planning can be a difficult topic. Nobody likes thinking about death, and conversations about family wealth can feel uncomfortable – but avoiding the conversation does not make the issue go away.
The earlier you consider it, the more options you have.
That does not mean giving everything away and leaving yourself short. You worked hard for your assets and your own financial security should come first.
The key is finding the right balance between protecting your own lifestyle and making sensible plans for the next generation.
Keep your plans under review
Tax rules change. Family circumstances change. Asset values change.
A plan that worked five years ago may no longer be the best plan today.
The recent changes to pensions, business relief and agricultural relief show how quickly the position can move. That is why Inheritance Tax planning should not be a one-off exercise.
It should be reviewed regularly, especially after major life events such as retirement, the sale of a business, the death of a spouse, changes in property values or changes to pension savings.
Need advice?
If you are unsure whether Inheritance Tax could affect you, it is definitely worth getting advice early.
At Seavor Chartered, we can help you understand your position, identify the risks and consider practical planning options that fit your circumstances.
The key is understanding what the tax rules mean for you and your family in real life! Need some help? Contact us today.
