IHT Planning Update - APR, BPR & Pension Changes

This article outlines key changes to UK Inheritance Tax (IHT) between 2025 and 2027, focusing on reforms to Agricultural Property Relief (APR), Business Property Relief (BPR), and the inclusion of unused pensions. Collectively, these changes represent a significant shift in estate planning.

The Three Major IHT Changes

There are three core developments that will affect many individuals and families:

• From April 2025, the existing non-domicile framework will be replaced by a new Long-Term Resident regime.
• From April 2026, a £2.5 million cap will be introduced on assets eligible for full (100%) APR and BPR relief.
• From April 2027, unused pension funds and certain death benefits will become subject to IHT.

Together, these measures significantly alter how wealth can be passed on and highlight the need for early, proactive planning.

APR and BPR Reform: The £2.5 Million Cap

From April 2026, full relief under APR and BPR will apply only to the first £2.5 million of qualifying assets. Any value above this threshold will receive 50% relief, resulting in an effective IHT exposure of 20%.

The £2.5 million allowance will be transferable between spouses and can be refreshed every seven years for lifetime gifts. However, for business owners and farmers with asset values exceeding this level, the changes may increase potential tax exposure and require a reassessment of existing structures.

Planning Considerations

These reforms place greater emphasis on careful estate planning, including:

• Reviewing lifetime gifting strategies
• Ensuring efficient ownership structures
• Updating wills to reflect the new rules

Wills and Use of Nil Rate Bands

Making full use of the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) remains central to effective IHT planning. Structuring wills to utilise the NRB on first death, often through discretionary trusts can help reduce the taxable value of the surviving estate while preserving access to the RNRB.

However, the interaction between these bands and the new APR/BPR cap introduces additional complexity, making precise and up-to-date drafting more important than ever.

Pensions: Inclusion within IHT from April 2027

From April 2027, unused pension funds will form part of an individual’s estate for IHT purposes. This represents a significant extension of the tax net.

Responsibility for reporting and paying any associated IHT will sit with personal representatives, even though pension assets are typically administered separately. This may create practical challenges and will require closer coordination between executors and pension providers.

Use of Life Assurance and Lifetime Gifting

Life assurance policies, particularly when written in trust can play a valuable role in providing liquidity to meet future IHT liabilities.

Lifetime gifting will also become increasingly important, including the use of exemptions such as gifts out of surplus income. In some cases, it may be appropriate to balance income tax considerations with potential IHT exposure when deciding how and when to withdraw pension funds.

Next Steps

The combined effect of these changes introduces greater complexity and underscores the importance of early planning. Reviewing your will, pension arrangements, and wider estate strategy in advance of these reforms will be key to managing future tax liabilities and ensuring the efficient transfer of wealth.

If you would like to discuss how these changes may affect your circumstances, please do not hesitate to get in touch with our tax team at tax@teamjs.co.uk.