In a move that could affect thousands of families and business owners across the UK, the government’s October 2024 Budget introduced sweeping changes to Inheritance Tax (IHT). These changes, set to take effect in April 2026, mark the most significant shift in how estates are taxed in decades.
If you own a family business, farmland, or other high-value assets, now is the time to prepare. These new rules could result in larger tax bills for your heirs unless proactive steps are taken today.
What Are the New Inheritance Tax Rules?
Currently, qualifying trading businesses and farmland often benefit from 100% IHT relief. This means that, when passed down, these assets may not be taxed at all. However, starting in April 2026, the first £1 million of these assets will remain eligible for full relief, but any value beyond that will only receive a 50% tax break.
In practical terms, this means:
- Assets over £1 million will be taxed at 20% (instead of 0% as before).
- This applies only to farmland and trading businesses, not to all estate assets.
- The change may force families to rethink succession plans, especially when their wealth is tied up in illiquid assets.
This shift could bring unexpected tax burdens, especially if families haven’t planned for them, and selling land or a business quickly isn’t always realistic.
Why Planning Early Matters
Timing is crucial in estate planning. The further ahead you plan, the more flexibility you have. Whether you’re transferring ownership, restructuring assets, or buying insurance, getting ahead of the 2026 deadline is essential.
Many families may be surprised to learn they fall within the scope of these new rules. If you’ve never thought of yourself as “wealthy” in tax terms, think again. Farmland values, successful businesses, or even a mix of both can easily tip an estate over the £1 million mark.
Three Key Strategies to Consider
1. Lifetime Gifting
Gifting during your lifetime is one of the simplest ways to reduce the value of your estate. The general rule is: if you live for seven years after making a gift, it usually won’t be counted towards your estate for IHT.
Benefits:
- Avoids IHT on the value of the gift (after seven years).
- Helps transition assets while you’re still around to advise and support.
- Especially useful for passing down land or business shares.
Things to keep in mind:
- Only gift what you can afford, make sure your own financial stability isn’t jeopardised.
- The £1 million IHT relief resets every seven years, which allows structured planning.
Case Example:
John, a farmer in Hertfordshire, gifted half of his £2 million farmland to his daughter in 2023. Assuming he lives past 2030, that gift escapes IHT, saving his family £200,000.
2. Selling Assets Strategically
If gifting isn’t an option, due to complexity, timing, or personal reasons, selling assets may be another route. However, there’s a catch: while the new 20% IHT rate applies to qualifying assets retained until death, cash proceeds from a sale are considered regular estate assets and taxed at 40%.
What you can do:
- Consider placing assets into a trust before selling them. This can help reduce the tax impact and give you more control over how proceeds are distributed.
- Evaluate whether the timing of the sale could trigger Capital Gains Tax (CGT), and plan accordingly.
- Reinvest proceeds into lower-tax or tax-efficient assets like gilts or qualifying corporate bonds.
Caution: Trusts can have upfront costs and administrative responsibilities, but they remain a powerful tool when used correctly.
3. Using Life Insurance to Cover IHT
Life insurance tailored to cover IHT liabilities can provide peace of mind. When set up correctly (i.e., held in trust), the payout is outside the estate and can be used to settle tax bills without selling key assets.
Why it works:
- Ensures liquidity for heirs.
- Helps cover IHT on gifted assets still within the seven-year window.
- Allows business or land ownership to remain intact.
Cost Factors:
- Premiums vary depending on age, health, and the amount of cover needed.
- Generally, younger and healthier individuals get better rates.
Case Example:
David, who owns a manufacturing company worth £2.2 million, faced a potential £240,000 IHT bill under the new rules. He purchased a life insurance policy in trust and began gifting shares. This strategy tackled his immediate tax exposure while safeguarding the company’s future.
Don’t Wait Until It’s Too Late
Estate planning is no longer a “someday” task, it needs to happen now. Waiting until 2026 or beyond could severely limit your options, especially if your estate includes high-value, illiquid assets.
By starting early, you can:
- Take full advantage of lifetime gifting timelines.
- Set up trusts or sell assets in a controlled way.
- Secure life insurance while premiums are lower.
Tailor Your Strategy
There is no universal solution. Each family has different values, assets, and goals. What works for one estate may not suit another. That’s why professional advice is critical, not only to interpret the new rules correctly, but to design a plan that fits your circumstances.
Final Thoughts
The changes to UK Inheritance Tax are not just a technical tweak, they represent a shift that could affect how family wealth is preserved (or lost) across generations. These rules shouldn’t be feared, but they should be planned for.
With the right strategy, whether that’s gifting, selling, using trusts, or insurance, you can take control, protect your legacy, and give your heirs the best start possible.
