Inheritance Tax Changes 2026: What You Need to K

Inheritance tax is one of those topics that gets people genuinely angry. The thresholds have been frozen for years, property prices have soared, and more families than ever are finding themselves caught in the net. Now, the government has added another change that could affect millions of people: pensions will be included in your estate for IHT purposes from April 2027.

Here is everything that has changed, what it means for you, and what you can do about it.

The current thresholds: still frozen

The nil-rate band, the amount you can pass on free of inheritance tax, remains at £325,000. It has been frozen at this level since 2009. Let that sink in. Seventeen years at the same figure, while house prices and wages have risen significantly. In real terms, the threshold is worth far less than it was.

On top of the nil-rate band, there is the residence nil-rate band (RNRB) of £175,000. This applies when you pass your main home to direct descendants (children, grandchildren, stepchildren). It was introduced in 2017 and has also been frozen since 2020.

Combined, this gives an individual an effective IHT-free threshold of £500,000.

For married couples and civil partners, any unused allowance from the first partner to die can be transferred to the surviving partner. This means a couple can potentially pass on up to £1,000,000 free of inheritance tax, provided the family home is left to direct descendants.

Anything above these thresholds is taxed at 40%.

The big 2026 change: pensions and IHT

This is the headline. In the Autumn Budget 2024, the Chancellor announced that unused pension funds will be included in your estate for inheritance tax purposes from April 2027.

Currently, if you die before age 75, your pension pot can be passed to beneficiaries completely tax-free. If you die after 75, your beneficiaries pay income tax when they draw from the pension, but there is no IHT charge. Pensions sit entirely outside the IHT net.

From April 2027, that changes. Your pension pot, however large, will be added to the value of your estate when calculating inheritance tax.

What this means in practice

Let us say you have a home worth £400,000, savings and investments of £150,000, and a pension pot of £300,000. Under the current rules, your estate for IHT purposes is £550,000 (the pension is excluded). With the £500,000 combined threshold, only £50,000 is subject to IHT.

From April 2027, the same person’s estate would be valued at £850,000. Now, £350,000 would be subject to IHT at 40%, creating a tax bill of £140,000. That is a massive difference.

This change was specifically designed to catch people who had been using their pensions as a tax-efficient inheritance vehicle, drawing down other savings in retirement while leaving the pension untouched to pass on. That strategy worked brilliantly. From 2027, it will not.

Who is affected?

If the total value of your estate including your pension is likely to exceed the nil-rate band (£325,000, or £500,000 with the RNRB, or up to £1,000,000 for a couple), you need to pay attention. With average pension pots growing and property values high, far more people will cross these thresholds than you might expect.

7 legitimate ways to reduce your inheritance tax bill

Inheritance tax is built on rules, and working within those rules to minimise your liability is entirely legal and expected. Here are seven strategies that genuinely work.

1. Use your annual gift exemption

Every individual can give away £3,000 per tax year free of inheritance tax. This is called the annual exemption. A couple can give away £6,000 between them. If you did not use last year’s exemption, you can carry it forward for one year, giving a potential £6,000 per person.

You can also make small gifts of up to £250 per person to as many people as you like, as long as they have not already received your £3,000 annual exemption.

2. Make regular gifts from income

This is one of the most powerful and underused exemptions. If you can demonstrate that your gifts are made from surplus income (not capital), are part of a regular pattern, and do not affect your standard of living, they are immediately exempt from IHT. There is no upper limit.

For example, if your pension income is £3,000 a month and your living costs are £2,000, you could gift £1,000 a month to your children and it would fall outside your estate immediately. The key is keeping records. Document your income, your expenses, and the gifts you make.

3. Give larger gifts and survive seven years

Any gift you make becomes fully exempt from IHT if you survive for seven years after making it. If you die within seven years, the gift is taxed on a sliding scale (taper relief):

0-3 years: 40% tax
3-4 years: 32%
4-5 years: 24%
5-6 years: 16%
6-7 years: 8%
7+ years: 0%

This is a straightforward way to reduce your estate if you are in good health and can afford to give money away early.

4. Leave money to charity

If you leave 10% or more of your net estate to charity, the IHT rate on the rest of your estate drops from 40% to 36%. This can actually result in your beneficiaries receiving more, not less, depending on the numbers. It is worth running the calculations.

Any amount left to charity is completely exempt from IHT regardless of the 10% rule.

5. Use trusts

Trusts can be a powerful tool for IHT planning, though they come with complexity. Putting assets into a trust removes them from your estate (subject to the seven-year rule and potential periodic charges). Common options include discretionary trusts and bare trusts.

Trusts are not a DIY job. Get professional advice. The rules are complex and getting them wrong can create a bigger tax problem than you started with.

6. Business Relief

If you own a business or shares in an unquoted company, Business Relief can reduce the value of those assets for IHT purposes by 50% or 100%. This also applies to certain AIM-listed shares (shares traded on the Alternative Investment Market).

You typically need to have owned the business or shares for at least two years. This is a significant relief and one of the reasons many business owners have a lower IHT liability than you might expect.

7. Spend your money (or put life insurance in trust)

It sounds obvious, but your estate is only taxed on what is left. If you have more than you need, spending it on experiences, helping your family during your lifetime, or investing in your property can reduce the eventual IHT bill.

Alternatively, take out a whole-of-life insurance policy written in trust. The payout covers the expected IHT bill, and because the policy is in trust, the payout itself is not part of your estate. Your beneficiaries use the insurance to pay the tax without losing the underlying assets.

The pension problem: what to do now

With pensions being brought into the IHT net from April 2027, anyone who was planning to leave their pension as a tax-free inheritance needs to reconsider their strategy.

Some options to discuss with a financial adviser:

Draw down your pension and gift the money using the regular gifts from income exemption (if it genuinely comes from surplus income)
Spend the pension first in retirement and preserve other assets that might benefit from reliefs
Review your overall estate plan to ensure you are using all available exemptions and reliefs
Consider life insurance in trust to cover any anticipated IHT liability created by the pension inclusion

This is not a minor tweak. For many families, it fundamentally changes the retirement drawdown strategy. The sooner you review your position, the more options you have.

When to get professional advice

If your estate (including your pension from 2027) is likely to exceed the nil-rate band, professional advice is not optional. It is essential. A good financial planner or estate planning solicitor will save you far more than they cost.

In particular, get advice if:

Your total estate including property and pensions exceeds £500,000 (or £1,000,000 as a couple)
You own a business or agricultural property
You have a complex family situation (blended families, estranged relatives)
You want to set up trusts
You are not sure whether the residence nil-rate band applies to your situation

The bottom line

The inheritance tax thresholds have not moved in 17 years, and now pensions are being pulled into the calculation from April 2027. More families will be affected than ever before.

The good news is that the tools to reduce your liability are well-established and entirely legal. Annual gifts, regular gifts from income, the seven-year rule, charitable giving, business relief, trusts, and life insurance in trust all work. The key is starting early, keeping records, and getting professional advice when the numbers are significant.

For a deeper look at each of these strategies, read my full guide on how to legally avoid inheritance tax. And if you are not sure where your estate stands, start with a simple calculation: add up your property, savings, investments, and pension. If the total is north of £325,000, it is time to start planning.

Inheritance Tax Changes 2026: What You Need to Know