Budget 2025: Inheritance Tax & Trust Reforms Explained | MA & Co Accountants

Budget 2025: Inheritance Tax & Trust Reforms Explained

📅 Published: 26th November 2025 ⏱️ 8 min read 💼 Tax Planning

Chancellor Rachel Reeves delivered Budget 2025 on 26th November 2025, introducing significant inheritance tax (IHT) reforms that will impact families, farmers, and business owners across the UK. While the Chancellor maintained existing nil-rate bands and extended certain agricultural and business property reliefs, she also introduced important changes to trust taxation and created new exemptions for compensation payments.

At MA & Co Accountants, we've analysed the Budget documents to bring you this comprehensive guide to the inheritance tax changes and their practical implications for your estate planning.

Key Takeaways from Budget 2025

IHT nil-rate bands frozen at current levels until April 2031
£1 million agricultural and business property relief allowance transferable between spouses
£5 million cap on trust charges for certain excluded property trusts
Full IHT exemption for infected blood compensation payments
Anti-avoidance measures targeting charity exemptions and offshore structures

1. Inheritance Tax Thresholds Extended to 2031

The government has maintained inheritance tax thresholds at their current levels for an additional year, extending the freeze until April 2031. This means:

Allowance	Amount	Frozen Until
Nil-Rate Band	£325,000	5 April 2031
Residence Nil-Rate Band	£175,000	5 April 2031
Combined Maximum (per person)	£500,000	5 April 2031
Combined for Married Couples	£1,000,000	5 April 2031

⚠️ Impact of Frozen Thresholds

With the nil-rate band frozen since 2009 and now extended to 2031, fiscal drag will pull more estates into the IHT net. HMRC estimates that the proportion of deaths resulting in an IHT charge will rise from approximately 4% in 2023-24 to nearly 7% by 2029-30.

2. Agricultural and Business Property Relief: Spouse Transferability

One of the most significant changes announced in Budget 2025 addresses concerns raised by farming families and business owners following reforms introduced at Autumn Budget 2024.

Background: The Autumn 2024 Reforms

At Autumn Budget 2024, the government introduced a £1 million allowance for the 100% rate of Agricultural Property Relief (APR) and Business Property Relief (BPR). For assets above this threshold, relief was reduced to 50%, creating potential IHT liabilities for larger farms and family businesses.

Budget 2025 Enhancement: Transferable Allowance

The Chancellor has now confirmed that any unused portion of the £1 million allowance will be transferable between spouses and civil partners, effective from 6 April 2026.

How the Transferable Allowance Works

Scenario: A married couple owns a family farm valued at £2.5 million. The first spouse dies, owning £800,000 of agricultural property. They use £800,000 of their £1 million APR allowance, leaving £200,000 unused.

Result: The surviving spouse now has a combined APR allowance of £1.2 million (their own £1 million plus the £200,000 transferred from their deceased spouse).

Benefit: This effectively doubles the relief available to married couples, providing up to £2 million of 100% APR/BPR relief for qualifying assets.

Retrospective Application

Importantly, this transferability applies even if the first death occurred before 6 April 2026, provided the estate qualifies for the relief under the new rules.

📋 Practical Example: Family Farm

The Johnson Family Farm

Mr and Mrs Johnson own a 200-acre arable farm in Lincolnshire valued at £3.2 million. Mr Johnson dies in January 2026 owning £1.6 million of the farm.

Without transferability:

Mr Johnson's APR: £1 million at 100%, £600,000 at 50% = £300,000 taxable
IHT liability: £120,000 (at 40%)

With spouse transferability (from April 2026):

Mrs Johnson inherits with unused allowance transferred
When Mrs Johnson later dies, the estate has £2 million combined APR allowance
On £3.2 million farm: £2 million at 100%, £1.2 million at 50% = £600,000 taxable
This represents significant IHT savings compared to losing the first spouse's unused allowance

Planning Considerations for Farmers and Business Owners

The transferable allowance provides important flexibility, but careful planning is still essential:

Ownership structures: Review how assets are owned between spouses to maximise use of both allowances
Succession planning: Consider generational transfers during lifetime using gift holdover relief
Partnership arrangements: Evaluate whether partnership structures optimise APR/BPR availability
Diversification: Remember that only qualifying agricultural/business assets receive relief
Seven-year rule: Lifetime gifts may still be beneficial for assets that won't qualify for 100% relief

3. Trust Tax Reforms: Capping Charges for Excluded Property

Budget 2025 introduces significant changes affecting trusts, particularly those established by individuals who were formerly non-UK domiciled.

Background on Excluded Property Trusts

Before 6 April 2025, non-UK domiciled individuals could establish offshore trusts that held "excluded property" - assets outside the UK IHT regime. Historic trusts of this nature have been affected by recent reforms to the domicile system.

The £5 Million Cap

From 6 April 2025, the government is introducing a £5 million cap on relevant property trust charges for historic trusts settled by former non-domiciled individuals.

What This Means

For trusts affected by the recent domicile reforms, periodic and exit charges under the relevant property regime will be calculated as if the trust value doesn't exceed £5 million, even if the actual value is higher.

This provides relief for settlors who established trusts in good faith under the previous rules and now find themselves subject to UK IHT on previously excluded property.

Wider Trust Anti-Avoidance Measures

The Budget also introduced several anti-avoidance provisions targeting trusts:

UK Agricultural Property via Non-UK Entities

From 6 April 2026, UK agricultural property held via non-UK entities will be treated as UK-situated for IHT purposes, closing a planning loophole.

Trust Asset Status Changes

Legislation will address situations where assets change status (e.g., from excluded to relevant property) shortly before an exit charge, preventing manipulation of the charging regime.

Charity Exemption Restrictions

Effective from 26 November 2025 (for lifetime gifts) and 6 April 2026 (for death estates), charity exemptions will be restricted to:

Direct gifts to UK registered charities
Gifts to certain established overseas charitable organisations

This prevents IHT avoidance through gifts to non-charitable clubs or overseas entities without clear charitable status.

⚠️ Trust Review Urgently Required

If you are a trustee or settlor of an offshore trust, particularly one established before the recent domicile reforms, you should seek specialist advice immediately. The interaction between the new £5 million cap, anti-avoidance provisions, and your specific trust structure requires expert analysis.

4. Infected Blood Compensation: Full IHT Exemption

In a compassionate move, the Chancellor announced comprehensive IHT relief for victims of the infected blood scandal and their families.

The Relief Covers:

Direct recipients: Individuals receiving compensation under the Infected Blood Compensation Scheme or Infected Blood Interim Compensation Payment Scheme
Inheritance situations: Where the eligible person dies before receiving compensation, payments made to their estate are exempt from IHT
Lifetime gifts: Recipients have a two-year window to gift some or all of the compensation without it being subject to IHT, even if they die within seven years

✓ Retrospective and Prospective Application

This relief applies to:

Compensation payments made before or after 26 November 2025
Gifts made on or after 4 December 2025

This ensures that families who have already received compensation, or made gifts from it, will benefit from the exemption.

Practical Implications

This is a rare example of compensation payments receiving blanket IHT exemption. Typically, compensation for personal injury is only exempt to the extent it remains held by the recipient or their surviving spouse. The infected blood provisions go further by:

Exempting payments even when the recipient has died
Allowing tax-free lifetime gifts of the compensation within two years
Recognising the unique circumstances and suffering of infected blood victims

5. Wider IHT Landscape: What Hasn't Changed

While Budget 2025 introduced targeted reforms, several expected changes did not materialise:

Pension Death Benefits

As previously announced, unused pension funds will be brought into the IHT regime from 6 April 2027. Budget 2025 confirmed administrative provisions allowing:

Personal representatives to direct pension schemes to withhold up to 50% of taxable benefits for up to 15 months to pay IHT
Discharge from liability for pensions discovered after HMRC clearance

IHT Rate

The 40% inheritance tax rate remains unchanged. There were no announcements on rate reductions or the introduction of a tapered rate system.

Potentially Exempt Transfers (PETs)

The seven-year rule for lifetime gifts continues unchanged. Gifts made more than seven years before death remain outside the IHT net.

6. Who Is Most Affected by These Changes?

Farming Families

The spouse transferability of APR allowances provides significant relief, effectively doubling the 100% relief available to £2 million for married couples. However, larger farms and estates still face substantial IHT liabilities under the new regime.

📋 Impact Analysis: Large Estate

Estate Profile: Married couple with £5 million agricultural estate

First death: Spouse inherits IHT-free (spouse exemption)

Second death (post-April 2026):

£2 million at 100% APR (combined spouse allowances) = £0 IHT
£3 million at 50% APR = £1.5 million chargeable
Less: Nil-rate bands (£1 million for couple) = £500,000 taxable
IHT liability: £200,000

Without spouse transferability, this liability would be approximately £400,000 higher.

Family Business Owners

Similar benefits apply to BPR-qualifying businesses. However, business owners must ensure their company activities qualify for BPR and that shares are held for the required two-year period.

High Net Worth Individuals with Trusts

Those with excluded property trusts established before the domicile reforms benefit from the £5 million cap, but should review structures in light of new anti-avoidance provisions.

Middle England

The extended threshold freeze means more "ordinary" estates will face IHT. A couple with a £1.2 million estate (including main residence) previously had no IHT to pay. As house prices rise but thresholds remain frozen, these families increasingly face IHT exposure.

7. Practical Planning Steps

Immediate Actions (Before 5 April 2026)

Review existing Wills: Ensure they account for the new spouse transferability provisions
Assess asset ownership: Consider how agricultural and business assets are split between spouses
Trust review: If you're a trustee or settlor, obtain professional advice on the £5 million cap and anti-avoidance rules
Document valuations: For APR/BPR purposes, ensure you have up-to-date professional valuations

Medium-Term Strategies

Lifetime gifting: The seven-year rule remains powerful for IHT planning
Business succession planning: Use gift holdover relief to transfer shares to the next generation IHT-efficiently
Life insurance: Consider whole-of-life policies written in trust to cover potential IHT liabilities
Pension planning: With pensions coming into IHT from 2027, review your retirement funding strategy
Charitable giving: Gifts to UK registered charities remain IHT-exempt and can reduce your estate below key thresholds

For Farming Families Specifically

Consider partnership structures to optimise APR availability across generations
Evaluate whether farmhouses and cottages qualify for 100% APR
Review diversification activities - renewable energy, camping, holiday lets may not qualify
Maintain detailed records of agricultural use and occupancy
Consider agricultural tenancies carefully, as they can affect APR

Need Expert IHT Planning Advice?

The inheritance tax changes in Budget 2025 create both opportunities and traps. Our specialist tax team can help you navigate the new rules and optimise your estate planning.

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8. When Should You Seek Professional Advice?

Given the complexity of the IHT regime and the interaction of various reliefs, you should seek specialist advice if:

Your estate (individually or as a couple) exceeds £1 million
You own agricultural land, a farm, or qualifying business assets
You are a trustee or have previously established offshore trusts
You were previously non-UK domiciled and have overseas assets or trusts
You are planning significant lifetime gifts
Your family situation is complex (remarriage, children from multiple relationships, overseas beneficiaries)
You own property overseas or have international connections
You are in business partnership with family members

⚠️ Don't Leave It Too Late

IHT planning is most effective when done well in advance. Many reliefs require assets to be held for minimum periods (two years for APR/BPR), and lifetime gifts need to survive seven years to fall outside your estate.

The complexities introduced by Budget 2025 - particularly around trust taxation and the interaction of multiple reliefs - mean that generic online advice or DIY Will writing may leave your family with unexpected tax bills.

9. Looking Ahead: What Might Change Next?

While Budget 2025 maintained the core IHT framework, political and economic pressures suggest further reforms may be coming:

Potential Future Developments

IHT rate review: There is ongoing debate about whether 40% is appropriate, with some calling for lower rates or a tapered system
Gifting rules: The seven-year period could be extended or the treatment of gifts with reservation changed
Main residence relief: The residence nil-rate band is complex and may be simplified or replaced
Pension integration: From April 2027, the details of how pension death benefits are taxed for IHT will become clearer
Lifetime gift allowances: Annual exemptions (£3,000) haven't increased since 1981 and may be reviewed

The Broader Tax Landscape

IHT planning doesn't exist in isolation. Budget 2025 also introduced:

Changes to capital gains tax rates on property, dividend and savings income
Reforms to pension tax relief (salary sacrifice cap from 2029)
Business rates changes affecting property-rich estates
New high-value council tax surcharge on properties over £2 million

An integrated approach to tax planning across IHT, CGT, income tax and business taxes is essential for optimal wealth preservation.

Conclusion: Planning in the New IHT Landscape

Budget 2025 has delivered a mixed picture for inheritance tax planning:

✓ Positive Developments

Spouse transferability of APR/BPR allowances provides significant relief for farming and business families
£5 million trust charge cap offers protection for historic excluded property trusts
Infected blood compensation recipients receive comprehensive IHT exemption
Administrative improvements for pension death benefits and IHT

⚠️ Challenges Ahead

Extended threshold freeze to 2031 brings more estates into the IHT net through fiscal drag
APR/BPR reforms still create significant liabilities for larger farms and businesses
Trust anti-avoidance provisions require careful navigation
Pension death benefits entering IHT from 2027 adds new complexity

The key message from Budget 2025 is that proactive planning is more important than ever. The combination of frozen thresholds, restricted reliefs, and anti-avoidance measures means that generic planning templates and outdated strategies may no longer work.

Whether you're a farming family concerned about the future of your land, a business owner planning succession, or simply want to ensure your loved ones inherit as much of your estate as possible, specialist advice tailored to your circumstances is essential.

Protect Your Legacy with Expert IHT Planning

At MA & Co Accountants, our tax specialists stay at the forefront of legislative changes to deliver practical, tax-efficient strategies for our clients. We combine technical expertise with commercial awareness to help you preserve your wealth for future generations.

Book your free initial consultation today to discuss how Budget 2025 affects your estate planning.

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Michael Elkan