IHT Tax Changes from April 2025 — Key Updates

Taylor Keeble
Jun 30
3 min read

Recent budget announcements have introduced significant changes to Inheritance Tax (IHT), effective from 6 April 2025. This article outlines the key updates and their potential impact.

IHT and Residence Status

Currently, IHT is based on domicile status. Non-UK domiciled individuals are only subject to IHT on their UK assets, while UK-domiciled individuals are taxed on their worldwide assets.

From 6 April 2025, IHT will shift to a residence-based system. Individuals classified as long-term residents will be liable for IHT on their worldwide assets. A long-term resident is someone who has been a UK resident for at least 10 out of the last 20 tax years.

For individuals under 20 years old, they will be considered long-term residents if they have spent at least 50% of their lifetime in the UK.

IHT "Tail" Period for Departing Residents

Long-term residents who leave the UK will remain within the IHT net for a period known as the tail. The length of the tail depends on their previous period of UK residence:

Fewer than 10 years — No tail period
10–13 years — 3 tax years
14 years — 4 tax years
15 years — 5 tax years
16 years — 6 tax years
17 years — 7 tax years
18 years — 8 tax years
19 years — 9 tax years
20 years or more — 10 tax years

The tail period resets once an individual has been non-resident for 10 consecutive years.

Transitional Rules

For non-domiciled individuals as of 30 October 2024 who are non-resident from 2025/26, the current deemed domicile rules will continue to apply. These individuals will only face IHT on overseas assets if they meet both of the following conditions:

UK resident for 15 out of the last 20 years
UK resident in at least one of the four tax years before death

Planning Opportunity

If you are set to become a long-term UK resident from 6 April 2025, you may benefit from gifting overseas assets before this date. Such gifts would not be subject to the seven-year survival rule.

Changes to Business Property Relief (BPR) and Agricultural Property Relief (APR)

Currently, BPR and APR offer relief at 100% or 50% under specific conditions:

100% BPR – Available for sole trader businesses, partnership shares, unquoted trading company shares, and AIM-listed shares.
50% BPR – Available for controlling interests in quoted companies and certain business assets like land, buildings, and machinery.
100% APR – Generally available unless the property is let under a qualifying lease.
50% APR – Applies if the property is tenanted under a pre-1 September 1995 lease with more than two years remaining.

From 6 April 2026, the availability of 100% relief for both BPR and APR will be capped at £1 million. Any value above this threshold will receive only 50% relief, resulting in an effective IHT rate of 20% (50% of the standard 40% IHT rate).

Additionally, from the same date, AIM-listed shares will qualify for only 50% relief.

Pension Changes

Currently, pension funds are outside the scope of IHT. However, from 6 April 2027, pension funds will become part of the deceased's estate for IHT purposes.

This change may result in double taxation in some cases:

If the deceased dies before age 75, beneficiaries will inherit the pension tax-free.
If the deceased dies after age 75, beneficiaries will pay income tax on the inherited pension at their personal rates.

This could result in a pension pot being taxed both via IHT and then again through income tax on the beneficiaries.