New 2025 Inheritance Tax Rules: How They Could Affect Your Home, Pension, and Gifts
By Fidelis News Staff | 13 August 2025
The UK government is considering significant reforms to inheritance tax (IHT) ahead of the autumn Budget, as ministers look for ways to boost revenue while managing political risk. Proposals under discussion include capping tax-free lifetime gifts, bringing pensions into IHT calculations, and reducing reliefs for business and agricultural property.
Key Proposed Changes
- Lifetime Gift Cap – Currently, gifts made more than seven years before death are exempt from IHT. The Treasury is considering a new monetary cap on such tax-free gifts, designed to close perceived loopholes and raise revenue.
- Pensions Subject to IHT – From April 2027, unused pensions and death benefits could be included in the deceased’s estate for IHT purposes, with estate representatives responsible for reporting. Treasury estimates suggest this could raise £1.5 billion by 2030.
- Caps on Agricultural & Business Relief – Relief on farms and family businesses would be capped at £1 million for full relief, with any amount above that receiving only 50% relief. This change, planned for April 2026, marks a major departure from the current unlimited reliefs.
- Thresholds Frozen Until 2030 – The main IHT threshold (£325,000) and residence nil-rate band (£175,000) are set to remain frozen until 2030, pulling more estates into the tax net over time.
Why It Matters
Inheritance tax is charged at 40% on estates above the applicable thresholds. Married couples and civil partners can combine allowances, meaning up to £1 million can pass tax-free under current rules. However, frozen thresholds and rising property values mean more middle-income families are becoming liable.
The proposed reforms could have a significant impact on asset-rich, cash-poor estates such as family farms and small businesses. Agricultural and business reliefs have long allowed such assets to pass between generations without triggering large tax bills, but the planned caps could change this dynamic.
Public Reaction
The potential reforms have already sparked controversy. Farming groups have warned of a “tractor tax” that could threaten the viability of family-run farms. Business organisations fear succession planning could become more costly and complex. Wealth managers caution that capping gift exemptions may discourage intergenerational wealth transfers.
Critics of IHT argue that it represents “double taxation” on already-taxed income and assets. Supporters counter that it promotes fairness by redistributing unearned wealth and funding public services.
Next Steps
Chancellor Rachel Reeves is expected to outline the full inheritance tax reform package in the autumn Budget. The announcement will be closely watched for potential mitigation measures, such as phased implementation or targeted reliefs, to soften the blow for smaller estates.
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