Inheritance Tax, Pensions and Property: Understanding Current Rules and Possible Future Reforms

Inheritance Tax (IHT) and Capital Gains Tax (CGT) are two areas that often cause confusion – and ongoing government reforms and proposals continue to shape how families plan for the future. Here’s an overview of the current position and what potential changes could mean for you.

Updates to Inheritance Tax: What You Need to Know

The government has introduced significant changes to Inheritance Tax rules, particularly affecting farms and family businesses:

APR/BPR Relief Allowances Increased

• Relief allowance increased: The allowance for Agricultural Property Relief (APR) and Business Property Relief (BPR) for 100% relief has been set at £2.5 million per person (up from the originally proposed £1 million). For couples, this effectively provides £5 million of potential relief.
• Why this matters: This adjustment helps ensure that many family farms and small businesses can be passed on without facing substantial tax bills.

Other Key Changes

Pensions Included in the Estate from April 2027

From April 2027, unused pension pots will form part of the taxable estate for IHT purposes. Personal representatives (executors) will be responsible for reporting and managing this process, simplifying the administrative burden compared to previous proposals.

Gifting Rules Under Review

The government has been examining the structure of lifetime gifting, including:

• A potential lifetime cap on tax‑free gifts
• A review of the 7‑year rule and taper relief

No changes have been finalised, but discussions suggest future reforms may adjust how gifts are treated for IHT planning.

Could Capital Gains Tax Apply to Inherited Property?

Under current rules, when you inherit a property, its value is reset to the probate value at the date of death. CGT only applies if you later sell it for more than that value.

However, there has been ongoing speculation and policy discussion suggesting that this rule could change. Proposals that have been publicly debated include:

• Aligning CGT rates with income tax rates, potentially increasing the tax paid on inherited assets when sold.
• Restricting Principal Private Residence Relief (PPR) for higher‑value properties, including those inherited.
• Broader wealth‑tax considerations, where CGT reform could form part of a more extensive rethink of how assets are taxed.

None of these have been legislated, but they remain active topics in policy circles.

What Does This Mean for You?

Property Owners

Anyone planning to leave a property to family members should stay aware of CGT discussions, as future reforms could affect the tax burden on beneficiaries.

Business and Farm Owners

The increase in APR/BPR allowances is helpful for many, but estates with substantial assets may still need detailed IHT planning—especially ahead of the pension changes from 2027.

Everyone Planning Their Estate

With gifting rules under review and pension pots due to be folded into estates for IHT, early planning remains one of the most effective ways to manage future tax exposure.

Gifting Rules and Pension Changes Explained

Current Gifting Rules

• You can make lifetime gifts that fall outside IHT if you survive seven years after making them.
• You also have an annual exemption of £3,000, along with other specific exemptions (e.g., gifts to spouses, charities, or regular gifts from income).
• If death occurs within seven years, taper relief may reduce the tax due.

Possible Future Changes to Gifting

The government has considered:

• A lifetime cap on tax‑free gifts
• Amending or removing taper relief
• Extending the seven‑year period

No final decisions have been made.