Budget 2025: Inheritance Tax

Capping Inheritance Tax Trust charges for former non-UK domiciled residents

One of the few measures being introduced retrospectively (applying back to April 2025), this measure introduces a cap on the amount of 10-year and Exit charges payable by Trusts which were excluded for UK IHT prior to the changes introduced from April 2025. 

Historically, following changes to non-dom legislation in 2017 and the introduction of the concept of Protected Trusts, use of overseas trusts to ringfence overseas assets from the UK tax net long term became very common. The changes announced in the October 2024 Budget effectively brought these trusts back into the UK tax net, leaving many in the difficult position of having to decide whether to retain the trust, along with all the costs that come with it, but without the previous tax benefits, or simply to wind it up.  

Those who decided to keep them will now be preparing to pay IHT liabilities of up to 6% of the value of the net assets held by the trust when they reach the next 10-year anniversary, if the settlor remains UK long term resident.

This measure forms part of several transitional reliefs which mean that any trust which held excluded property prior to 30th October 2024 will benefit from a cap in how much IHT is payable. In a full 10-year cycle it will be capped at £5 million. For shorter periods (i.e. the first time a periodic charge arises after the April 2025 changes), the cap will be set at £125,000 per quarter in that period. This will cover both periodic and Exit charges.    

IHT and Infected Blood Compensation payments

This change is an extension of the existing legislation where payments from the Infected Blood Compensation scheme are exempt from UK Inheritance Tax (IHT). These changes mean that where someone has already died at the time the payment from the scheme is made in relation to their case, the first living recipient(s) of that payment will receive an IHT credit to pass on the value of the compensation following their own death, without an IHT charge.  

It will also be possible for all or some of the compensation payment to be passed on within 2 years of receipt without any subsequent IHT, should the donor pass away. 

Inheritance Tax – Anti-avoidance measures for non-long-term UK residents and trusts

This change brings UK situs agricultural property and buildings into the UK IHT net in a similar way to residential property, by looking at the underlying asset, rather than the situs of the structure. 

Historically, UK agricultural property held by an overseas company or overseas trust, would not be considered relevant property for non-long term UK tax residents, and so is not subjected to IHT on death (up to 40%), or in the case of trusts, not subject to periodic (10-year) or Exit charges (up to 6% at relevant intervals).   

Following this announcement, trust Exit charges will apply with immediate effect and IHT will apply on deaths on or after 6th April 2026. 

In addition, where a settlor ceases to be a long-term UK resident, there will be an IHT charge if there is a later change in situs of their trust assets from UK to non-UK, so that the trust cannot manipulate situs rules to avoid an Exit charge. 

Inheritance Tax – Anti-avoidance measures for charities

IHT charity exemption will now be restricted to gifts made directly to UK charities and community amateur sports clubs. Gifts to trusts which do not meet the required charity or club definition will no longer be exempted because it is not possible to confirm whether they have UK jurisdiction or if they are regulated.  

The changes will take effect for lifetime charitable gifts after 26th November 2025 or on a death from 6th April 2026. 

Inheritance Tax thresholds and rates

These remain frozen at £325,000 for the nil rate bands, £175,000 for the residential nil rate band, and with the tapering point still at £2 million for the residential nil rate band.  The rate payable remains at 40% before taking into account any reliefs.  

Ability to Transfer the £1 million Annual Percentage Rate (APR)/ Business Property Relief (BPR) allowances between spouses

In October 2024 it was announced that from April 2026 100% IHT relief for qualifying APR and BPR assets would be capped at £1 million per person (combined for both APR and BPR assets), and just 50% relief thereafter. The way the policy was drafted was that the allowance would apply per person without the ability to transfer between spouses, something that is possible in relation to the standard nil rate band and residential nil rate band.  

During the Budget speech it was announced that when the changes to APR and BPR come into force in April 2026 the £1 million allowance will be transferrable between spouses. This is a change to the original draft legislation which did not allow this.  

Any unused amount of the £1 million allowance will therefore be transferred to a surviving spouse or civil partner from 6th April 2026. In addition, if the first death was before 6th April 2026, it will be assumed the entirety of the £1 million allowance will be available for transfer to the surviving spouse or civil partner. 

Trusts will also qualify for their own £1 million allowance, but for trusts set up post 30th October 2024 there are some restrictions, and where multiple trusts have been settled, the allowance will be reduced.  

Alternative Investment Market (AIM) listed shares will not qualify for the 100% relief at all but will be eligible for 50% relief. It will be possible for IHT on qualifying assets to be paid via 10 annual instalments, interest free.  

Reforming Inheritance Tax – unused pension funds and death benefits

Under current legislation, undrawn pension pots pass IHT free on death, making them a useful tool for tax planning. In the October 2024 Budget, it was announced that this exemption would be removed from 6th April 2027. This did not affect death in service benefits payable from a registered pension scheme, which remain excluded for IHT purposes even after 6th April 2027. 

Clarification has now been given about how the IHT will be collected, and it has been confirmed that whilst personal representatives (Executors/Administrators) will be liable for reporting and paying any Inheritance Tax due, they will be able to direct the pension scheme administrator to either pay the IHT to HMRC prior to releasing the balance, or to withhold 50% of the taxable benefits for up to 15 months post death prior to making payment. 

Funds under £1,000 will fall outside of these rules, as will any continuing annuities.  

Personal representatives will also be protected from liability for pensions discovered after they have received clearance from HMRC.