The Ultimate Guide to Inheritance Tax in 2026/27

Inheritance tax used to be the kind of issue most families could safely ignore. The thresholds and reliefs meant many estates fell outside IHT, and most families never had an IHT bill to worry about.

That’s no longer reliably true.

The nil-rate band has been frozen at £325,000 since 2009 and is now confirmed frozen until April 2031. Property values have risen significantly over that period.

Two of the biggest historical reliefs – Business Property Relief and Agricultural Property Relief – have a new £2.5m limit on 100% relief from 6 April 2026. And from 6 April 2027, most unused pension funds and death benefits will be brought into the IHT net, reducing the effectiveness of a planning route many families had used.

This guide covers how IHT works in 2026/27, what’s changed, and what families and business owners should be thinking about now.

How Inheritance Tax Works in 2026/27

IHT is a tax on the value of someone’s estate when they die – their property, savings, investments, possessions and certain lifetime gifts, less debts.

It applies at a flat 40% on the value above the available thresholds. A reduced 36% rate applies where at least 10% of the net estate is left to charity.

The 2026/27 thresholds are unchanged from previous years:

For a single person leaving a home to children or grandchildren, that’s up to £500,000 tax-free.

For a married couple or civil partners, both sets of allowances are transferable on the first death, so the survivor’s estate can pass on up to £1m without IHT – provided the home is left to direct descendants.

Above £2m, the RNRB starts to taper away. For an individual it’s gone entirely at £2.35m. For a couple with both allowances transferred, it’s gone at £2.7m – and the lost RNRB alone can cost £140,000 in extra IHT on a couple’s combined estate.

The £2.5 Million APR/BPR Allowance from 6 April 2026

Business Property Relief and Agricultural Property Relief used to give 100% relief on qualifying business and farming assets with no upper limit.

From 6 April 2026, that’s no longer true.

What’s Changed

Legislation taking effect from 6 April 2026 introduces a £2.5 million 100% relief allowance for qualifying APR and BPR assets. Above the £2.5m allowance, qualifying assets get 50% relief instead – which produces an effective IHT rate of 20% on the excess.

Key features of the new regime:

• The £2.5m allowance is per person, combined across APR and BPR. It’s not a separate allowance for each relief.
• Any unused allowance can be transferred to a surviving spouse or civil partner. If the first spouse died before 6 April 2026, they’re treated as having a full unused £2.5m allowance available to transfer.
• Combined with transferable nil-rate bands, a couple could pass up to £5.65m tax-free in qualifying business or farming assets in the right circumstances (£5m of allowance plus £650k of transferable NRB).
• Lifetime gifts of qualifying property can reduce the unused allowance available to transfer. HMRC’s example shows a £500,000 lifetime gift reducing the transferable allowance from £2.5m to £2m.
• Above the allowance, the option to pay IHT in 10 equal annual instalments interest-free is being extended to all property eligible for APR or BPR. That’s a useful cashflow protection for estates that would otherwise have to sell trading assets to pay the tax bill.

How the Allowance Applies to Lifetime Gifts

The £2.5m allowance applies to qualifying lifetime transfers as well as death estates. For deaths on or after 6 April 2026, the allowance includes qualifying APR/BPR property in the estate, qualifying property given away on or after 30 October 2024 if the gift was made within seven years of death, and other qualifying property treated as part of the estate.

Where lifetime gifts are relevant, the allowance is applied in date order, starting with the earliest qualifying lifetime transfer. Any remaining allowance is then shared across qualifying agricultural or business property in the death estate.

This matters for planning: gifts made before the changes were announced may still consume part of the allowance if death occurs within seven years.

AIM Shares Take a Bigger Hit

Shares admitted to trading on recognised stock exchanges designated as “not listed” – including AIM shares – will receive 50% Business Relief rather than 100%. They don’t use the £2.5m 100% relief allowance at all, so even an estate well within the £2.5m cap will see relief halved on AIM holdings.

For investors who built AIM portfolios specifically as IHT planning vehicles, this is a substantial change.

The strategy worked because AIM stocks held for two years could pass IHT-free under the old 100% rate. With relief halved and the £2.5m allowance not applying, the tax saving on AIM holdings is materially reduced.

What This Means in Practice

The government estimates around 1,100 estates a year will pay more IHT under the new rules – a small number relative to the total, but a meaningful one for the families and businesses involved.

Around 85% of estates currently claiming APR will see no change because their qualifying assets fall below the allowance.

Where the allowance matters, planning options include:

• Transferring qualifying assets earlier through lifetime gifts, but only after modelling the seven-year rules, the order in which the £2.5m allowance is applied, loss of control, CGT, and the transitional rules for gifts made on or after 30 October 2024
• Reviewing wills, since the new allowance only applies to chargeable transfers of qualifying APR/BPR property. Leaving everything to a surviving spouse may preserve the unused allowance for transfer, but it may not be the best succession route where business or farming assets are intended to pass to the next generation. The right answer depends on the will wording, asset values and who should ultimately own the business or farm
• Restructuring share ownership ahead of major succession events
• Using trusts where appropriate, though the rules around trust treatment under the new regime are complex

Pensions Joining the IHT Net from 6 April 2027

This is the next big change on the horizon, and the one that’s likely to affect the largest number of families.

The Old Rule

Until now, most defined contribution pension pots have sat outside the estate for IHT purposes.

If you died before age 75, death benefits from many DC pensions were typically outside IHT and often free of income tax, subject to the two-year rule, the lump sum and death benefit allowance, and the type of benefit paid.

If you died at 75 or over, beneficiaries paid income tax at their own rates on what they drew – but no IHT applied either way. For higher-net-worth families, this made pensions one of the most efficient wealth-transfer tools available.

The New Rule

For deaths on or after 6 April 2027, most unused pension funds and death benefits will be brought into the estate for IHT purposes.

The government estimates that, in 2027/28, around 10,500 estates will have an IHT liability where they previously would not, and around 38,500 estates will pay more IHT than before.

The key features:

• Unused defined contribution pots count towards the estate. This includes uncrystallised funds and most lump sum death benefits.
• The spouse and civil partner exemption will still apply, so pension death benefits passing to a surviving spouse or civil partner shouldn’t create an IHT charge.
• Charity payments are still exempt.
• Dependant scheme pensions from defined benefit and collective money purchase arrangements are out of scope. Annuity and survivor-benefit treatment depends on the product and scheme terms, so it should be checked rather than assumed.
• Death-in-service benefits payable from registered pension schemes remain outside the new IHT rules.
• Personal representatives (executors) will be responsible for reporting and paying any IHT due – a position the government settled on after consultation, instead of the original proposal that put it on pension scheme administrators.

The 64-67% Combined Tax Risk

For pension holders aged 75 and over leaving funds to non-spouse beneficiaries, the combined effect of IHT plus income tax can be severe.

The pension pot is hit by IHT at 40% on the way into the estate, then beneficiaries pay income tax on what they draw out.

The maths is unforgiving. A £100,000 pension passing to a higher-rate beneficiary loses £40,000 to IHT, leaving £60,000. Income tax at 40% on the rest takes another £24,000 – making the combined tax rate 64%. For an additional-rate beneficiary on 45%, the combined rate climbs to 67%.

Most families won’t see anything like that figure, but anyone with a substantial pension and non-spouse intended beneficiaries should be reviewing their position now, ahead of the 2027 start date.

Spouses, Civil Partners and the Transferable Bands

The spousal exemption is one of the most important rules in IHT. Transfers between spouses or civil partners – at death or during lifetime – are generally exempt from IHT.

The exemption can be restricted where one spouse or civil partner is a long-term UK resident and the other is not. From 6 April 2025, domicile was replaced by a residence-based IHT regime.

What this means in practice:

• The first spouse to die can leave their entire estate to the survivor with no IHT
• Any unused NRB and RNRB transfers to the survivor’s estate
• The same applies to the new £2.5m APR/BPR allowance
• A couple’s combined nil-rate position can therefore reach £1m on a typical estate, or £5.65m on an estate dominated by qualifying business or farming property in the right circumstances

That said, the new APR/BPR rules make will reviews more important than they used to be. A clause that worked under the old unlimited 100% relief – like “all business property to the children, residue to the spouse” – may not be optimal under the new £2.5m capped regime.

The wording, asset values and intended succession route all need fresh consideration.

Lifetime Gifting and the 7-Year Rule

You can give assets away during your lifetime, and if you live for at least seven years after the gift, it falls outside your estate entirely.

Gifts within seven years of death are pulled back into the IHT calculation, with taper relief reducing the tax due on gifts made between three and seven years before death.

A few exemptions sit alongside the seven-year rule:

• £3,000 annual gift exemption: Total gifts up to this amount each tax year are immediately exempt. Unused allowance can be carried forward one year only.
• Small gifts of up to £250 per recipient: As long as the same recipient doesn’t also benefit from the £3,000 allowance.
• Wedding or civil partnership gifts: Up to £5,000 from a parent, £2,500 from a grandparent or great-grandparent, or £1,000 from anyone else.
• Gifts out of normal income: Payments made from regular surplus income that don’t reduce your standard of living. This is one of the more powerful exemptions and one of the most underused.
• Gifts to charities and qualifying political parties: Unlimited and immediately exempt.

For families with assets above the thresholds, lifetime gifting remains one of the simplest and most effective ways to reduce future IHT exposure. The seven-year clock matters – starting earlier gives the strategy more chance to work.

Practical Planning for 2026 and Beyond

The changes coming through over 2026 and 2027 mean that IHT planning is back on the agenda for families and business owners who hadn’t given it much thought before.

Some specific things worth doing now:

• Review your will: Wills drafted under the old rules may now produce unintended outcomes – especially for couples with significant business or farming assets where the £2.5m allowance interacts with old “everything to the spouse” or “BPR to the children” clauses.
• Model your estate at 2027 prices: Add unused pension funds to the position. If the total now sits above £2m, the RNRB taper is in play. If it’s above the new APR/BPR allowance, the position gets more complex.
• Consider lifetime transfers carefully: The seven-year clock matters, but so do anti-forestalling provisions for gifts after 30 October 2024, the order in which the allowance is applied, capital gains tax implications, and loss of control.
• Review pension nominations: Particularly where a non-spouse beneficiary is named – the 2027 changes may shift what’s optimal. Spending more pension during retirement, rather than preserving it as inheritance, is now worth modelling.
• Look at trusts where appropriate: Trusts can still be useful for control, protection and timing, but the rules interact with the new £2.5m allowance in non-obvious ways.
• Take advice early: This is the kind of planning where small structural decisions made years in advance can save substantial sums later. Last-minute changes rarely work as well.

How Double Point Can Help

Inheritance tax is one of those areas where a few hours of planning early can save tens or hundreds of thousands of pounds for the next generation.

With the APR/BPR allowance applying from 6 April 2026 and pension changes due for deaths on or after 6 April 2027, the position you set up two years ago is unlikely to be the right one going forward.

At Double Point, our chartered accountants help families and business owners model their position properly, review wills and structures, and put practical tax planning in place ahead of the 2027 changes.

Book a free consultation and we’ll talk through your situation.