Inheritance Tax Changes 2026: What You Need to K

How much of your money should the government take after you die?

That is not a philosophical question. It is a practical one that now affects far more families than it used to. The inheritance tax thresholds have been frozen since 2009, property values have roughly doubled in that time, and the government has just announced that pensions will be pulled into the IHT calculation from April 2027. If you have a house, a pension, and some savings, there is a real chance your estate is now above the threshold.

I think about this stuff more than most people. I retired at 40 with a combination of ISAs, a SIPP, and property. My own estate planning had to start early because I was no longer earning. Every decision about where to hold money, how to draw it down, and what to pass on matters. And the April 2027 pension change has forced me to rethink parts of that plan.

Here is what has changed, what it means, and what you can actually do about it.

The thresholds: frozen for 17 years

The nil-rate band (the amount you can pass on free of IHT) is £325,000. It has not moved since 2009. Seventeen years at the same figure while wages and house prices have climbed significantly. In real terms, that threshold is worth far less than it was.

There is also the residence nil-rate band (RNRB) of £175,000. This applies when you pass your main home to direct descendants (children, grandchildren, stepchildren). It was introduced in 2017 and has been frozen since 2020.

Together, that gives an individual an IHT-free threshold of £500,000.

For married couples and civil partners, any unused allowance from the first partner to die can transfer to the surviving partner. That means a couple can potentially pass on up to £1,000,000 free of IHT, provided the family home goes to direct descendants.

Anything above those thresholds is taxed at 40%.

The headline change: pensions and IHT from April 2027

In the Autumn Budget 2024, the Chancellor announced that unused pension funds will be included in your estate for inheritance tax purposes from April 2027.

Right now, if you die before 75, your pension can pass to beneficiaries completely tax-free. If you die after 75, beneficiaries pay income tax on withdrawals, but there is no IHT charge. Pensions sit entirely outside the IHT calculation.

From April 2027, that ends. Your pension pot, regardless of size, gets added to your estate when calculating inheritance tax.

What this looks like with real numbers

Say you have a home worth £400,000, savings and investments of £150,000, and a pension pot of £300,000.

Under current rules: Your estate for IHT purposes is £550,000 (pension excluded). With the £500,000 combined threshold, only £50,000 is subject to IHT. Tax bill: £20,000.

From April 2027: Your estate is valued at £850,000 (pension included). Now, £350,000 is subject to IHT at 40%. Tax bill: £140,000.

That is a £120,000 difference for the same person with the same assets.

This change targets people who were deliberately spending down their savings in retirement while leaving their pension untouched, passing it on as a tax-free inheritance. That strategy was perfectly legal and genuinely brilliant. From 2027, it will not work.

Who needs to pay attention?

If the total value of your estate (including your pension) is likely to exceed £325,000 for an individual, or £500,000 with the RNRB, or £1,000,000 as a couple, this affects you. With average pension pots growing and property values at current levels, that catches more people than you would think.

7 ways to reduce your inheritance tax bill

IHT is built on rules. Working within those rules to minimise what your family owes is entirely legal, entirely expected, and something everyone should be doing.

1. Use your annual gift exemption

Every individual can give away £3,000 per tax year free of IHT. A couple can give away £6,000 between them. If you did not use last year’s exemption, you can carry it forward for one year, meaning a potential £6,000 per person.

You can also give up to £250 per person to as many people as you like, provided they have not already received your annual exemption.

It is not a huge amount. But £6,000 a year for 10 years is £60,000 removed from your estate. Consistency matters.

2. Make regular gifts from income

This is one of the most powerful and most underused IHT exemptions. If you can demonstrate that your gifts come from surplus income (not capital), follow a regular pattern, and do not affect your standard of living, they are immediately exempt. There is no upper limit.

For example, if your pension income is £3,000 a month and your living costs are £2,000, you could gift £1,000 a month to your children and it falls outside your estate straight away. The catch is record-keeping. You need to document your income, expenses, and gifts clearly. HMRC will want to see a pattern, not a one-off.

3. Give larger gifts and survive seven years

Any gift becomes fully exempt from IHT if you survive seven years after making it. If you die within seven years, the gift is taxed on a sliding scale:

0-3 years: 40%
3-4 years: 32%
4-5 years: 24%
5-6 years: 16%
6-7 years: 8%
7+ years: 0%

This is straightforward if you are in good health and can afford to give money away early. The sooner you start, the more falls outside the seven-year window.

4. Leave 10% to charity

If you leave 10% or more of your net estate to charity, the IHT rate on the rest drops from 40% to 36%. Depending on the size of your estate, this can actually result in your family receiving more, not less. It is worth running the numbers.

Any amount left to charity is completely exempt from IHT regardless.

5. Use trusts (carefully)

Trusts can remove assets from your estate, subject to the seven-year rule and potential periodic charges. Discretionary trusts and bare trusts are the most common options for IHT planning.

A word of caution: trusts are not a DIY project. The rules are complex, and getting them wrong can create a bigger tax liability than you started with. Get professional advice.

6. Business Relief

If you own a business or shares in an unquoted company, Business Relief can reduce the value of those assets for IHT by 50% or 100%. This also applies to certain AIM-listed shares.

You typically need to have owned the business or shares for at least two years. This is a significant relief and one of the reasons many business owners have a lower IHT liability than you might expect given the value of their assets.

7. Spend your money (or insure the bill)

Your estate is only taxed on what is left. If you have more than you need, spending it on experiences, helping your family while you are alive, or improving your property reduces the eventual bill.

Alternatively, consider a whole-of-life insurance policy written in trust. The payout covers the expected IHT bill, and because it is in trust, the payout itself sits outside your estate. Your beneficiaries use the insurance to pay the tax without selling the house or liquidating investments.

The pension problem: what to do before April 2027

With pensions being pulled into the IHT calculation, anyone who planned to leave their pension untouched as a tax-free inheritance needs a new strategy. Options to discuss with a financial adviser:

Draw down your pension and gift the money using the regular gifts from income exemption (if it genuinely comes from surplus income and does not affect your living standard)
Spend the pension first in retirement and preserve other assets that might benefit from reliefs (business property, AIM shares)
Review your overall estate plan to make sure you are using every available exemption and relief
Consider life insurance in trust to cover the anticipated IHT liability from pension inclusion

This is not a minor adjustment. For many families, it fundamentally changes the order in which you draw down your retirement income. The sooner you review your position, the more options you have. Sound familiar? It should. Early action is the theme of almost everything I write about money.

When professional advice is not optional

If your estate (including your pension from 2027) is likely to exceed the nil-rate band, you need professional help. A good financial planner or estate planning solicitor will save you far more than their fees.

Get advice if:

Your total estate including property and pensions exceeds £500,000 (or £1,000,000 as a couple)
You own a business or agricultural property
You have a blended family or complex family situation
You want to set up trusts
You are not sure whether the residence nil-rate band applies to you

Where this leaves you

The IHT thresholds have not moved in 17 years. Pensions are being pulled in from April 2027. More families are caught in the net than ever before.

The good news: the tools to reduce your liability are well-established and completely legal. Annual gifts, regular gifts from income, the seven-year rule, charitable giving, Business Relief, trusts, life insurance in trust. They all work. The key is starting early, keeping records, and getting advice when the numbers are significant.

For a deeper look at each strategy, read my full guide on how to legally avoid inheritance tax. And if you are not sure where your estate stands, do a simple calculation today: add up your property, savings, investments, and pension. If the total is north of £325,000, it is time to start planning.

Inheritance Tax Changes 2026: What You Need to Know