Upcoming Inheritance Tax changes: what families need to know

Why inheritance tax is back in the spotlight

Inheritance tax (IHT) is one of those subjects that often gets pushed to the bottom of the to-do list. It does not feel urgent until it suddenly is. With rising house prices, frozen tax-free allowances and new rules arriving in 2027, many families are starting to ask how they can prepare.

The truth is, inheritance tax is no longer just an issue for the very wealthy. Even families with an average-sized home, some savings and a pension can now find themselves above the threshold. For loved ones, that can mean facing an unexpected bill of thousands of pounds at an already stressful time.

Thinking ahead is not about beating the tax system. It is about making thoughtful choices so the people you care about most are not left with a burden.

Inheritance tax in simple terms

Here is how the rules work today:

• You can pass on £325,000 of assets tax-free. This is known as the nil-rate band.
• If you leave your home to children or grandchildren, you may get an extra £175,000 tax-free. This is called the residence nil-rate band.
• Together, this gives you £500,000 per person or £1 million for a couple.
• Anything above those limits is taxed at 40%.

The issue is that these allowances have been frozen for years, while property and asset values have kept rising. That is why more estates are being drawn into inheritance tax each year.

The changes coming in 2027

Pensions will be counted towards inheritance tax

At the moment, pensions are usually kept outside of your estate, so they are often passed on without IHT. From 6 April 2027, this will change. Unused pension pots will be included when working out the value of your estate.

That means:

• If your estate plus your pension is over the tax-free threshold, it may now be taxed
• Your executors, not your pension provider, will need to declare and pay the tax
• Families who had not expected pensions to be caught by IHT could find themselves facing a new liability

For many households, pensions are one of the largest assets they own. This change alone could push more estates into the IHT net.

Gift rules could change

At present, you can give away:

• Up to £3,000 each year without it being counted
• Small gifts of £250 per person
• Larger gifts, provided you live for at least seven years afterwards

There is speculation that these rules may be tightened. If that happens, families will have fewer ways of passing on wealth during their lifetime.

Thresholds will remain frozen

The nil-rate band of £325,000 and residence nil-rate band of £175,000 are both frozen until at least 2030. With the average house price in the UK now over £285,000, and closer to £500,000 in London, it is easy to see why more families are exceeding the threshold.

This freeze acts as a “stealth tax”, quietly pulling more estates into inheritance tax each year without any headline rise in rates.

Why it matters

Imagine a family who bought their home for £180,000 in the late 1990s. Today, it is worth £550,000. Add in a pension pot and some savings, and the estate could easily be over £1 million.

Under the current rules, pensions do not count. But from 2027, they will. This could mean a sizeable tax bill for their children, even though the parents may never have considered themselves wealthy.

This is why more people are paying attention. Inheritance tax is no longer something that only affects a small minority.

Steps you can take now

Review your will

Having an up-to-date will is one of the simplest ways to protect your wishes and may help reduce tax.

Check your pension nominations

If you have not updated who your pension should go to, the funds could end up inside your estate and taxed.

Consider making gifts sooner

Making use of today’s gift allowances could be worthwhile, especially if the rules are tightened. Giving while you are alive also means you can enjoy seeing your loved ones benefit.

Explore options such as trusts

Trusts are not suitable for everyone, but they can be a useful tool for controlling how wealth is passed down.

Plan early

The earlier you start thinking about inheritance tax, the more choices you will have. Leaving it until rules change may reduce your options.

Planning as an act of care

I have spoken with many families who feel uncomfortable talking about inheritance tax. It is not always easy to think about what will happen after you are gone. But when people do take action, it is almost always out of care for those they love.

I have seen families avoid painful decisions because plans were made in good time, and I have seen the relief and peace of mind that brings. In my experience, planning ahead for inheritance tax is one of the most selfless steps you can take.

Key points to remember

• More estates are being caught by inheritance tax each year.
• From April 2027, pensions will be counted as part of your estate.
• Gift rules could change, reducing current options.
• Thresholds are frozen until at least 2028, so more families will be affected.
• Starting early gives you more flexibility and peace of mind.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. Always seek professional advice before making financial decisions.