Legislation Day 2025 – reforms to UK Inheritance Tax

On 21^st July 2025, HM Revenue & Customs (“HMRC”), as part of Legislation Day, published further details on a series of reforms to UK inheritance tax (“IHT”) initially announced at the Autumn Budget 2024. These updates have been provided in the form of policy papers, summaries of consultation responses and draft legislation for inclusion in the Finance Bill 2025-2026 (with accompanying explanatory notes).

We have outlined below the key IHT-related announcements, noting changes which have occurred since the Autumn Budget 2024. For further details of the IHT measures as tabled in the Autumn Budget 2024, please refer to our previous Law-Now publication.

Taxation of unused pension funds and death benefits

In the Autumn Budget 2024, it was announced that, with effect from 6^th April 2027, most unused pension funds and death benefits would be, for the first time, brought within a deceased person’s estate for IHT purposes. The intention of this change is to discourage the increased use and marketing of pension schemes as a tax planning vehicle for the intergenerational transfer of wealth. The existing IHT exemptions, such as in respect of assets passing to a surviving spouse or civil partner, will remain in place and be unaffected by these changes.

On Legislation Day, the policy paper, draft legislation and consultation response summary make clear that there have been two important developments to the proposed IHT changes since the Autumn Budget 2024, as follows:

1. Process for reporting and paying IHT on unused pension funds and death benefits - The government has confirmed, in a change to the original proposals, that personal representatives (“PRs”) (rather than pension scheme administrators (“PSAs”)) will have primary responsibility to report and pay IHT on unused pension funds and death benefits to HMRC. The initial proposal for PSAs to bear responsibility was seemingly suggested with the aim of avoiding situations whereby PRs could not access sufficient estate funds to pay the IHT attributable to the pension amounts and double taxation concerns relating to income tax liabilities arising to beneficiaries drawing down on the inherited pension amounts to reimburse the PRs for IHT payments. Notwithstanding these concerns, the change comes as a result of consultation feedback which highlighted that a PSA-led process would likely lead to unnecessary administrative burdens and delays in paying out funds to pension beneficiaries. Recognising challenges that could arise in relation to a PR-led process, the government’s response also points to measures to address them, such as the direct payment scheme and the option to direct the PSA to pay. We expect further guidance tools and process maps to be published ahead of implementation. Trustees (in their role as PSAs) will have new information sharing obligations and overriding duties to pay IHT from scheme assets in some circumstances.
2. Death in service benefits – The government has confirmed that all death in service benefits payable from registered pension schemes will be outside of the scope of IHT. This represents another reversal of the initial proposal in light of consultation feedback which emphasised the need to ensure consistent treatment of lump sum payments between different types of death in service benefits.

Reforms to Agricultural Property Relief and Business Property Relief

Despite significant lobbying, the government has not shown any signs of backing away from its Autumn Budget 2024 announcement to curtail the existing unlimited 100% IHT relief under Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”) to a combined £1 million allowance for qualifying property (and 50% relief thereafter) with effect from 6^th April 2026. On Legislation Day, the government issued a policy paper, draft legislation and consultation response summary to explain the reforms in further detail.

While the draft legislation envisages that the £1 million allowance will be increased in line with the consumer price index (albeit not before 6^th April 2030), the amount of comfort that can be drawn from this is unclear. Given the long time horizon and the tendency to resist such increases elsewhere (noting the nil-rate band has not been increased since 2009), time will only tell.

Transitional provisions

The transitional provisions which apply to both trusts (as regards to trust taxation charges) and individuals (as regards to potentially exempt transfers and lifetime chargeable transfers) remain unchanged from the consultation proposals. These proposals, which were generally well received by consultation respondents, should be considered carefully in each case as the timing of the settlement of assets into trust and of any lifetime gifts (and subsequent donor death) can materially impact the tax outcome.

Individuals

The government has also reaffirmed its position that any of the combined £1 million APR and BPR allowance that is unutilised will not be transferable between spouses or civil partners on death, despite the divergence this creates with the nil-rate band and residence nil-rate band regimes (as highlighted by several consultation responses). The government noted the limiting factor here is “Exchequer cost”.

Trusts

The focus of the technical consultation was on the application of the proposed changes to BPR and APR to property settled into trust. The draft legislation confirms that while the combined £1 million APR and BPR allowance will refresh every 10 years for relevant property trusts, this will not be the case for special trusts (such as 18-to-25 trusts).  

An anti-fragmentation rule will be introduced to prevent individuals from accessing multiple £1 million allowances by settling qualifying property into multiple trusts/settlements. Where qualifying property is settled into multiple trusts/settlements on or after 30^th October 2024, the individual will have a single £1 million allowance for 100% tax relief, allocated chronologically against the earliest transfer until fully utilised.

In the consultation, the government had also proposed a second anti-fragmentation rule be adopted, being that the existing rules for valuing related property are extended such that qualifying property settled by the same settlor across multiple trusts could be connected for valuation purposes when calculating 10-year anniversary charges and exit charges. However, based on responses to the consultation which recognised the complexities in administering such a proposal, this has now been dropped.

Technical amends to residence-based tax regime

In the written statement made by James Murray (the Exchequer Secretary to the Treasury), it was noted that several “technical fixes” to the legislation contained in the Finance Act 2025 would be needed to ensure that the legislation “works as intended” following changes to the non-dom regime. One such example relates to amendments required to ensure that the IHT spousal election for non-long term resident spouses or civil partners would, as intended, lapse after 10 consecutive years of non-residence have passed. Further details on these amends are awaited.

CMS Comment

The Legislation Day announcements in relation to IHT largely remain as originally proposed in the Autumn Budget 2024, especially, in relation to key issues which have not been bereft of discussion and speculation over the preceding months. However, the government has clearly taken on board consultation responses and adapted their position accordingly.

The draft legislation is, as expected, highly complex and technical. IHT planning, in the context of a constantly changing regime, should be revisited at regular intervals to take into account legislative changes and the direction of travel more generally.