UK: How the Upcoming Inheritance Tax Changes Will Affect You in 2025

The UK government is set to introduce several significant changes to Inheritance Tax (IHT) rules in April 2025. These updates, announced last year, will alter how IHT is applied across various assets. Many families will find themselves affected by the new measures, which could lead to higher tax liabilities.

According to DevonLive, these changes will unfold over several years, with the potential to impact thousands of estates, especially those with offshore assets, agricultural holdings, and pensions.

A series of significant modifications to Inheritance Tax laws are coming into effect over the next several years. These changes are expected to impact thousands of families, particularly those with offshore assets, agricultural holdings, and pension savings.

Non-Domiciled Status and Residency-Based Taxation
One of the most substantial changes is the modification of how IHT is applied to individuals with non-domiciled (non-dom) status. Starting in April 2025, individuals who have held non-dom status will no longer be exempt from IHT on foreign assets. Taxation will instead be based on the individual’s residency status.

Josh White, probate expert at Level Group, explains:

Essentially, something called ‘non-domiciled (or non-dom) status’ will no longer exempt individuals from paying IHT on their foreign assets. Instead, tax will be based on their residence.

A new ‘Long-Term Resident’ (or LTR) rule is being introduced, which means that 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. Meantime, non-LTRs will only be taxed on their UK assets.

Even LTRs planning to leave the UK will still be taxed on worldwide assets for up to 10 years. This rule change is set to affect approximately 9,300 individuals per year.

This change will primarily affect individuals with offshore trusts, which were previously exempt from Inheritance Tax. Now, if the settlor of such a trust is an LTR, the trust will be subject to IHT for 10 years after they leave the UK. This rule is expected to affect around 9,300 people annually.

Impact on Agricultural and Business Assets
Starting in April 2026, changes to IHT will also affect agricultural and business assets. While families will still be able to pass on up to £1 million in agricultural and business assets without incurring IHT, any value above this threshold will now be taxed at a rate of 20%, half the usual 40% rate.

Josh White adds :

This change means that families can still pass on up to £1 million in agricultural and business assets to loved ones tax-free, but above £1m, assets will now face IHT at a 20% rate, half as much as the usual 40%. Previously, small farms could be passed down through generations without IHT liability.

This change has sparked protests among farmers, with the National Farmers Union claiming that it could impact up to 70,000 farms, far exceeding the government’s estimate of 500 farms annually.

Pensions to Be Included in IHT Calculations
Another significant change will take place in April 2027, when defined contribution pension schemes will be included in IHT calculations. This means that pension savings, which were previously excluded from Inheritance Tax, will now count towards the value of a person’s estate. As a result, many estates will face higher IHT bills, with an estimated 40,000 estates affected by this change.

Finally, the IHT threshold freeze is set to end in 2030, which will result in a substantial increase in the number of people who are liable for IHT. By that time, the government expects that one in 10 UK families will be affected by IHT, up from the current rate of around one in 20.

The end of the threshold freeze will mark a major shift in Inheritance Tax liability, potentially requiring families to take a more proactive approach in estate planning.

As these changes approach, it is increasingly important for individuals and families to plan ahead to minimise the impact of IHT. The closing of various tax loopholes makes it more critical than ever to understand how these new rules will affect your estate and your loved ones.