Major Inheritance Tax Reforms Transform UK Wealth Taxation in 2025

Understanding the Significance of Inheritance Tax Changes

The United Kingdom is experiencing one of the most significant shifts in the taxation of wealth in recent decades as sweeping inheritance tax (IHT) reforms come into force. These changes, which began taking effect from 6 April 2025, represent a fundamental departure from the traditional domicile-based system that has governed wealth taxation for over a century. The reforms are expected to impact thousands of families across the UK, particularly those with international assets, agricultural holdings, and substantial pension savings.

Key Changes to Inheritance Tax Rules

Residence-Based Taxation System

From 6 April 2025, the concept of domicile as a connecting factor for inheritance tax purposes will be replaced with the concept of a long-term resident. Under the new framework, anyone who has been resident in the UK for 10 of the last 20 years will be subject to Inheritance Tax on their worldwide assets. This marks a significant change from previous rules governing non-domiciled individuals, with this rule change set to affect approximately 9,300 individuals per year.

Current Tax Thresholds and Rates

In the current tax year (2025/26), everyone has an Inheritance Tax-free allowance of £325,000, with 40% normally charged on any amount above that. For those leaving property to direct descendants, the Inheritance Tax-free allowance increases to £500,000 for anyone who leaves their home to their ‘direct descendants’. The nil-rate band (£325,000) and residence nil-rate band (£175,000) will remain frozen until at least 2030.

Impact on Pensions and Agricultural Assets

One of the most significant upcoming changes concerns pensions. Pensions will start forming part of your estate and counting towards your Inheritance Tax-free allowance from the 2027/28 tax year, with an estimated 40,000 estates affected by this change. For agricultural and business properties, families will still be able to pass on up to £1 million in agricultural and business assets without incurring IHT, but any value above this threshold will now be taxed at a rate of 20% from April 2026.

What This Means for UK Families

The consequences of these reforms extend well beyond high-net-worth individuals. Around 94% of people don’t have to pay a penny in inheritance tax currently, but by 2030, the government expects that one in 10 UK families will be affected by IHT, up from the current rate of around one in 20. With frozen thresholds and expanding scope, proper estate planning has become more critical than ever for protecting family wealth and minimising tax liabilities.