Inheritance Tax 2025: The Widening Net — An Editor's Column

Inheritance tax was once described as a voluntary levy paid only by people who didn't plan. That characterisation looks increasingly strained. Between frozen thresholds, rising property values, and a proposed change that would bring pension pots into the estate for the first time in decades, the number of families facing an IHT bill is growing — and many of them are surprised to find themselves there. This is a commentary on the landscape, not a prescription for any individual household.

Editor's Note & Qualification

With that framing in place: here is the editorial view from where we sit, watching how the policy landscape is reshaping the inheritance-tax conversation for ordinary families in the UK.

A Tax That Was Supposed to Affect the Few

Inheritance tax applies at 40% on estates above the nil-rate band (NRB) of £325,000, a threshold that has been frozen since 2009. For those leaving a main residence to direct descendants, an additional residence nil-rate band (RNRB) of £175,000 applies, giving a combined threshold of £500,000 per individual — or up to £1 million for a married couple or civil partnership, assuming the full residence nil-rate band is available and the estate is structured correctly.

When these thresholds were originally set, only a small proportion of estates exceeded them. Then two things happened simultaneously: property values rose significantly while the thresholds were frozen. The Office for Budget Responsibility projects that IHT receipts will continue climbing as fiscal drag does its quiet work. Families who consider themselves solidly middle-class — not wealthy, not legacy-planners, just people who bought a house decades ago — are discovering that their estate looks very different on paper to how it feels in practice.

This is the widening net. It is not dramatic. It does not arrive with a letter. It simply grows as house prices drift higher and the nil-rate band does not move to meet them.

The Proposed 2027 Pension Change — and Why It Is Not Yet Law

The element of the 2024 Autumn Budget that generated the most heat in financial planning circles was the proposal to bring unused defined-contribution pension funds into the scope of IHT from April 2027. Currently, pension pots sit outside the estate — they pass to nominated beneficiaries free of IHT, though income tax may still apply on withdrawals after the owner's death. The proposed change would end that treatment.

Important qualification: this change is proposed and subject to legislation. As of the date of this article it has not yet been enacted, and it may be amended, delayed, or withdrawn before it takes effect. The government has consulted on the implementation details and they remain complex — particularly around the interaction between IHT and the income tax that beneficiaries pay on pension withdrawals, which could in some scenarios produce a combined effective rate well above 40%. Given how contentious the detail has been, it is not unreasonable to watch carefully before making irrevocable decisions.

That said, if the proposal does become law on its current timetable, the implications are significant. Many people have deliberately used their pension as an inheritance vehicle — drawing on ISAs and other savings first, leaving the pension untouched. That strategy may need revisiting. Our estate planning tools let you model how your pension interacts with your estate under both the current rules and the proposed 2027 change, which is useful for scenario planning even while the legislation remains in draft. See also our dedicated explainer on what happens to your pension when you die for how the current rules work in practice and what the proposed change could mean for beneficiaries.

The Sequencing Question

One of the most common estate-planning questions is about the order in which to draw down savings and investments in retirement. For many years, the conventional wisdom was to spend taxable savings first (ISAs, general investment accounts, bank deposits) and leave the pension untouched for as long as possible, on the basis that it sat outside the estate and could be passed tax-efficiently to the next generation.

That sequencing logic has been disrupted — at least on paper — by the proposed 2027 change. If pensions do enter the estate, the strategic advantage of preserving them over other savings diminishes. Whether to reorder drawdown strategy in response depends enormously on individual circumstances: the size of the estate relative to the thresholds, the age and health of the pension holder, whether there are young beneficiaries who might benefit from income tax flexibility, and the degree of confidence one has that the legislation will proceed as announced.

What many families are finding useful is a structured scenario comparison — modelling the estate outcome under the current rules, the proposed rules, and a hybrid of partial pension access — before deciding whether and how to adjust. Scenario and stress-test tools that can run these comparisons across multiple planning assumptions are increasingly part of how people approach this, alongside professional advice.

This is a context where a single calculation is rarely the answer. The sequencing that works for a 62-year-old in good health with a large DB pension and modest DC pot is entirely different from the approach that makes sense for a 70-year-old with significant DC savings and a house that already breaches the NRB. Individual circumstances dominate.

Fiscal Drag and the Mainstream Estate

One thing that does not receive enough attention is the combined effect of fiscal drag across wealth types. It is not just property. The nil-rate band freeze applies to the whole estate — including investment portfolios, savings, and now potentially pension pots. As each of these components grows (in nominal terms, sometimes just keeping pace with inflation), the gap between the estate and the unchanged threshold widens automatically.

A family with a house worth £450,000, modest ISA savings, and a pension pot of £200,000 might comfortably sit below any IHT threshold today — but in ten years, with property price growth and investment returns, the picture changes materially even if no active decisions are made. The planning challenge is that these changes are gradual and invisible until they are not.

The consultation on extending the NRB freeze to 2030 (and possibly beyond) has made this a long-run issue rather than a short-run aberration. It is now part of the structural backdrop, not a temporary anomaly to wait out.

The Gifting Conversation

Against this backdrop, the question of lifetime giving is coming up in more family conversations than it used to. The IHT annual gift exemption — £3,000 per person per year, with the ability to carry forward one unused year — is small relative to the size of many estates, and the more powerful mechanisms (Potentially Exempt Transfers, gifts out of surplus income) require either a seven-year survival period or careful documentation of income patterns.

Families are weighing questions like: does it make more sense to give while alive and see the impact, or to structure the estate for efficiency at death? Is the seven-year clock a meaningful risk given age and health? Does giving now affect the giver's own financial security and spending flexibility in retirement?

The framing of giving "with warm hands" — enjoying the act of giving while alive rather than leaving it all to be distributed after death — has gained traction as a planning concept, though it sits in obvious tension with the practical need to preserve enough for a comfortable and long retirement. Our article on giving with warm hands explores that balance in more depth, including the gifting rules and the seven-year clock.

For most people, the gifting conversation is not primarily a tax conversation. It is a conversation about values, family dynamics, and the timing of support. The tax efficiency is secondary. That said, the two are not unrelated, and understanding the rules tends to make the conversation clearer.

What Families Are Reviewing

Without prescribing any particular course of action, the areas that people are commonly reviewing in the context of the current and proposed IHT landscape include:

• Nomination forms — ensuring pension death nominations are up to date and reflect the family structure as it is now, not as it was when the form was first completed. Because the pension is paid by the trustees rather than through the will, an outdated nomination can produce unexpected outcomes.
• Will structures — reviewing whether existing wills make full use of the available nil-rate bands for both partners, particularly where property ownership and other assets have changed since the will was last drafted.
• Business and agricultural reliefs — Business Property Relief and Agricultural Property Relief are also being reformed from April 2026, capping full relief at a combined £1 million per individual. Families with business interests or agricultural land are working through what this means in practice.
• Trust arrangements — while trusts are not a simple solution and carry their own tax and administrative complexity, they remain a planning tool that advisers often explore in the context of larger estates or specific family circumstances.
• Life insurance — policies written in trust (so the payout sits outside the estate) are a common way to earmark funds to cover a future IHT bill, preserving the underlying assets rather than requiring a forced sale.

None of these are straightforward decisions, and the interaction between them is often the point at which professional input adds the most value. The tax rules are specific and the penalties for getting it wrong can be significant.

Why This Matters Now

The current moment in UK inheritance tax policy is unusual. The 2027 pension change, if it proceeds, will represent the most significant structural shift in IHT treatment of pensions since the introduction of pension freedoms in 2015. The BPR/APR reforms are a substantial change for business owners and farmers. The nil-rate band freeze has been running for fifteen years and looks set to continue. And property values in most parts of the UK have drifted upward in nominal terms throughout.

The combination of these factors is what makes the planning conversation feel more urgent than it has in the recent past. Not because anything catastrophic is happening, but because the gap between where many families are and where the thresholds sit is narrowing year by year without anyone having to do anything at all.

We have written previously about how to think about planning under policy uncertainty more generally — building resilience across multiple possible outcomes rather than optimising for a single assumed tax regime. That framing applies here too: the IHT landscape is genuinely uncertain, and strategies that remain sensible across a range of scenarios tend to age better than those that depend on a specific legislative outcome.

The most useful thing anyone can do with this landscape is to understand their own exposure: what their estate looks like today, what it might look like in ten years on reasonable assumptions, and where the main levers are. That is a modelling exercise, not a commitment to any particular course of action. From there, the conversation with a qualified, FCA-regulated adviser becomes much more productive, because both parties are starting from the same picture of the numbers rather than from a vague sense of concern.