Budget 2025 Inheritance Tax Changes: What You Need to Know

Chancellor Rachel Reeves delivered the Autumn Budget 2025 on November 26, 2025, with several important updates affecting inheritance tax. Whether you're planning your estate, managing a family business, or recently became an executor, these changes will impact your planning.

This comprehensive guide explains exactly what changed, who's affected, and what you need to do next.

Quick Summary: What Changed in Budget 2025

The Autumn Budget 2025 announced four key inheritance tax updates:

1. IHT thresholds frozen for an additional year (now until April 2031)
2. £2.5 million farm and business allowance for 100% relief, with transferability between spouses
3. Infected blood compensation payments exempt from IHT (compassionate measure)
4. Previously announced 2024 changes confirmed (business/farm caps April 2026, pensions April 2027)

Let's break down each change and what it means for you.

Change 1: IHT Thresholds Frozen Until 2031

What Changed

The nil-rate band and residence nil-rate band were previously frozen until April 2030. Budget 2025 extended this freeze by one additional year, until April 2031.

Why This Matters: Fiscal Drag

The nil-rate band has been £325,000 since April 2009. That's 22 years at the same level.

During this time:

• UK house prices have increased approximately 65%
• Average UK house price in 2009: £154,000
• Average UK house price in 2025: £290,000+
• Inflation has eroded the value of the threshold by over 40%

The result: More estates are being dragged into the inheritance tax net every year, a phenomenon called "fiscal drag."

Who's Affected

• In 2009: Approximately 1 in 50 estates (2%) paid inheritance tax
• In 2025: Approximately 1 in 20 estates (5%) pay inheritance tax
• By 2031 (projected): Potentially 1 in 12-15 estates (6-8%) will pay inheritance tax

You might now face an IHT bill if you have:

• A semi-detached house in the South East (£350-450k)
• Modest savings and investments (£50-100k)
• A pension pot (which will be subject to IHT from 2027)
• Total estate value: £400-600k

This is no longer a tax just for "the wealthy" - it's increasingly affecting middle-class families.

What You Should Do

Action 1: Calculate your estate value

Add up:

• Property (main residence + any buy-to-lets)
• Savings and investments (ISAs, stocks, bonds)
• Pensions (from April 2027, these count)
• Life insurance policies not in trust
• Business interests
• Valuable possessions (jewelry, art, vehicles)

Subtract:

• Outstanding mortgage
• Loans and debts
• Funeral costs (estimated)

Action 2: Review your will

With frozen thresholds, your will from 5-10 years ago may no longer be tax-efficient. Consider:

• Are you using both nil-rate bands if married?
• Is your residence nil-rate band optimized?
• Are your beneficiaries still appropriate?
• Have you appointed suitable executors?

Action 3: Explore legitimate IHT reduction strategies

If your estate exceeds the thresholds:

• Annual gifting allowance (£3,000 per year)
• Small gifts exemption (£250 per person per year)
• Wedding gifts (£5,000 to children, £2,500 to grandchildren, £1,000 to others)
• Regular gifts from income (if you can afford it)
• Charitable donations (10% to charity reduces IHT rate from 40% to 36%)
• Life insurance in trust (to cover the tax bill)

Change 2: Farm and Business Relief Allowance Is Transferable

What Changed

Last year's Budget (October 2024) announced significant changes to agricultural property relief (APR) and business property relief (BPR):

• From 6 April 2026: The first £2.5 million of qualifying business or agricultural assets will receive 100% IHT relief
• Above £2.5 million: Only 50% relief applies (effective tax rate of 20%)

This caused enormous controversy, particularly among farming families. Over 10,000 farmers protested in London in November 2024.

How It Works

Before Budget 2025:

• Each spouse has a £2.5 million allowance for 100% relief
• Couldn't transfer unused portion
• Required complex planning on first death to "use up" allowances

After Budget 2025:

• First spouse dies: Can leave their £2.5 million allowance unused
• The unused allowance transfers to surviving spouse
• Second spouse may have access to both allowances (up to £5 million at 100% relief)

Important: If the first death occurred before April 6, 2026, the entirety of the allowance is assumed to be available for transfer to the surviving spouse.

Real-World Example

Who Benefits

This change benefits:

• Family farmers with farms valued over £2.5 million
• Family business owners with business assets over £2.5 million
• Anyone with qualifying APR/BPR assets who wants simplified planning

The transferability removes the pressure to make complex inheritance decisions while grieving the loss of a spouse.

What You Should Do

If you're a family business owner or farmer:

Action 1: Review your succession plan

The transferability makes planning simpler, but you still need a plan for when the second spouse dies. Consider:

• Life insurance to cover any IHT bill above the available allowance
• Gifting strategies (though the 7-year rule applies)
• Business restructuring (if appropriate)
• Succession planning (who will run the business/farm?)

Action 2: Update your will

Ensure your will:

• Reflects the transferable allowance
• Includes spousal exemption clauses
• Names appropriate executors who understand business/farm assets
• Addresses how IHT will be paid (from estate, specific assets, insurance?)

Action 3: Get professional valuation

With the April 2026 reforms now in effect, you need to know:

• Current value of your business/farm
• Which assets qualify for APR/BPR
• Projected value at death (for planning purposes)
• How much IHT might be due

Action 4: Prepare for April 2026

The new rules took effect on 6 April 2026. Review the position now:

• Finalize any restructuring
• Set up life insurance policies (underwriting takes time)
• Update wills and trusts
• Communicate plan to family members

Change 3: Infected Blood Compensation Exempt from IHT

What Changed

All compensation payments from the Infected Blood Compensation Scheme are now exempt from inheritance tax, regardless of the circumstances in which those payments are passed down.

Background

Between the 1970s and 1990s, thousands of people in the UK were infected with HIV and hepatitis C through contaminated blood products. The government established a compensation scheme for victims and their families.

Previously, while compensation payments made directly to victims were exempt from IHT, complex issues arose when:

• The victim died more than two years before receiving payment
• Compensation was paid to the estate
• The compensation was then passed to beneficiaries

This created a "secondary transfer" problem where families faced unexpected IHT bills on compensation payments.

How It Works Now

Who Benefits

This affects:

• Families of infected blood scandal victims
• Estates where compensation was received posthumously
• Recipients making onward gifts to family members

This is a compassionate measure ensuring that families affected by the tragedy don't face additional tax burdens.

Change 4: Confirmation of 2024 Changes

What Was Confirmed

Budget 2025 confirmed that all changes announced in Autumn Budget 2024 will proceed as planned:

What This Means

Some people hoped the government might reverse or significantly amend the controversial 2024 changes, particularly regarding farms.

They didn't.

The changes are in effect. The allowance is £2.5 million per person for 100% relief, and its transferability can help married couples and civil partners but does not eliminate tax on larger estates.

Who's Affected

Business and farm owners (April 2026):

If you own qualifying business or agricultural assets worth over £2.5 million (or £5 million for married couples with transferable allowance), the excess may face IHT at an effective rate of 20% before other allowances and reliefs.

Pension savers (April 2027):

If you die with unused pension funds, they'll be included in your estate for IHT purposes.

This fundamentally changes retirement planning strategy for many people.

Timeline: When Do Changes Take Effect?

What You Should Do Now

For Everyone

1. Calculate your IHT liability

Use our free calculator to understand your potential IHT exposure. You'll need:

• Property values
• Savings and investments
• Pension values (for 2027 onwards)
• Business assets (if applicable)
• Outstanding debts

Takes 5 minutes. Completely free. No signup required.

2. Review your will

When did you last update your will?

• 5+ years ago: Likely needs updating
• 10+ years ago: Almost certainly needs updating
• Don't have one: Urgent priority

Your will should:

• Reflect current asset values
• Use nil-rate bands efficiently
• Include residence nil-rate band planning
• Appoint suitable executors
• Address IHT payment

3. Consider IHT reduction strategies

Legitimate ways to reduce IHT:

• Gifting: £3,000 annual exemption, plus potentially exempt transfers (PETs)
• Charitable giving: 10% of estate to charity reduces rate from 40% to 36%
• Life insurance in trust: Covers tax bill without increasing estate value
• Pension planning: Review strategy given 2027 changes
• Spend it: Can't tax what's not there (enjoy your wealth!)

4. Get professional advice

Consider professional advice if:

• Your estate exceeds £500,000
• You own a business or farm
• You have complex family situations (second marriages, estranged children, etc.)
• You have assets in multiple countries
• You're unsure about tax efficiency

For Family Business Owners and Farmers

Following the April 2026 reforms:

1. Get professional valuation

• Current business/farm value
• Which assets qualify for relief
• Projected growth

2. Finalize succession planning

• Who inherits/runs the business?
• How will IHT be paid?
• Business structure optimized?

3. Arrange life insurance

• Cover projected IHT bill
• Set up in trust (to avoid increasing estate)
• Underwriting takes 6-12 weeks

4. Update legal documents

• Wills reflecting transferable allowance
• Powers of attorney
• Business succession agreements
• Shareholder agreements (if applicable)

5. Consider restructuring

• Is current ownership structure optimal?
• Would gifting make sense (7-year rule)?
• Family limited partnerships?
• Trusts?

Get advice from:

• Solicitor specializing in estate planning
• Accountant familiar with BPR/APR
• Financial adviser for insurance/investments
• Business valuers

For Pension Savers

Before April 2027 (16 months):

1. Rethink pension vs ISA strategy

• Previously: Pensions were attractive for IHT-free wealth transfer
• Now (from 2027): Pensions subject to IHT

Consider:

• Should you max out ISAs first? (ISAs are in estate but can use allowances)
• Spend pension in lifetime, preserve ISAs for inheritance?
• Balance between IHT efficiency and retirement income needs

2. Review beneficiary nominations

Ensure your pension has:

• Up-to-date beneficiary nominations
• Appropriate discretionary trust nomination (if suitable)
• Clear instructions for trustees

3. Consider drawdown timing

With pensions now in estate from 2027:

• Drawing down pension in lifetime reduces estate value
• But need to ensure sufficient retirement income
• Balance IHT efficiency with lifestyle needs

4. Life insurance strategy

If you were relying on pensions to pass wealth IHT-free:

• Life insurance in trust can replace this function
• Cost vs benefit analysis needed
• Set up before April 2027

Common Questions

Q: Will the nil-rate band ever increase?

The nil-rate band is frozen until April 2031. After that, it's expected to increase with CPI (Consumer Price Index), unless the government extends the freeze again. Historically, thresholds were indexed to inflation. The 22-year freeze (2009-2031) is unusual and controversial.

Q: Can I avoid the farm/business tax by gifting to children now?

Potentially, but there are risks:

• The 7-year rule: Gifts are potentially exempt transfers (PETs). If you survive 7 years, they're IHT-free. If you die within 7 years, they're taxed (with taper relief after 3 years).
• Loss of control: Once gifted, you no longer own or control the assets.
• Capital Gains Tax: Gifting can trigger CGT on appreciated assets.
• Reservation of benefit: If you gift the farm but continue farming it, it may still be in your estate.

This requires careful professional advice. Don't rush into gifts without understanding the implications.

Q: Should I move money from pensions to ISAs before 2027?

It depends on your situation. Consider:

Advantages of moving to ISAs:

• ISAs can use nil-rate bands and residence nil-rate band
• ISAs don't have income tax on inheritance (pensions do if inherited after 75)
• More control and flexibility

Disadvantages:

• Pension withdrawals are taxed as income (could be 40-45%)
• ISA annual limit is £20,000 (takes time to transfer large amounts)
• Loss of pension tax-free lump sum on future withdrawals
• May need the pension for retirement income

This is a complex decision requiring financial advice specific to your circumstances.

Q: What if I'm not married - can I still get the £5 million combined farm allowance?

The transferable £2.5 million allowance applies to married couples and civil partners. Unmarried couples, even long-term partners, cannot transfer unused allowances.

For unmarried business/farm owners:

• Each person has a £2.5 million allowance (not transferable)
• Consider marriage or civil partnership (controversial but tax-efficient)
• Alternative structures: Family limited partnerships, trusts
• Life insurance to cover tax on amounts over the available allowance

Q: How do I know if my business qualifies for Business Property Relief?

Business Property Relief applies to:

• A business or interest in a business (100% relief)
• Shares in an unlisted company (100% relief)
• Shares controlling more than 50% of an AIM-listed company (50% relief from April 2026)
• Land, buildings, or machinery owned and used in a business you were a partner in or controlled (50% relief)

Must be owned for 2 years before death and:

• Mainly trading (not investment) business
• Not mainly dealing in securities, stocks, shares, land or buildings
• Not mainly making or holding investments

Many businesses qualify, but it's not automatic. Get professional assessment.

Summary and Action Plan

Key Takeaways

1. Frozen thresholds until 2031 mean more families will pay IHT through fiscal drag
2. Transferable £2.5m farm/business allowance helps families but does not eliminate exposure above the allowance
3. Infected blood compensation is now IHT-exempt (compassionate measure)
4. 2024 changes confirmed - no U-turn on farm/business caps or pension inclusion
5. April 2026 reforms are now in effect and should be reflected in current estate planning

Your Action Plan

Conclusion

The Autumn Budget 2025 brought both relief and continued challenges for those planning their estates.

The transferable £2.5 million allowance for farms and businesses is important for families planning around the post-April 2026 rules. The infected blood compensation exemption rights a long-standing wrong.

However, the continued freeze of IHT thresholds until 2031 means more middle-class families will face inheritance tax bills. Combined with pensions entering the IHT net in 2027, estate planning is becoming more important than ever.

The key is to plan ahead. With the April 2026 reforms now in effect for business and farm owners, now is the time to:

• Understand your IHT exposure
• Review and update your will
• Explore legitimate reduction strategies
• Get professional advice for complex situations

The frozen thresholds and new rules mean inheritance tax is no longer something you can ignore and hope it doesn't apply to you. For many families, proactive planning is the difference between leaving your loved ones a legacy or leaving them a tax bill.