Inheritance Tax Changes in the 2025 Budget

The UK Government’s recent budgets — the Autumn Budget 2024 and Spring Statement 2025 — have brought significant changes to the Inheritance Tax (IHT) system. From frozen thresholds dragging more ordinary families into the IHT net, to new rules on pensions and agricultural property, these reforms directly affect homeowners, families, and anyone who wants to pass on what they’ve worked for.

These changes can feel overwhelming. But as Mike Pugh, founder of MP Estate Planning, often says: “Plan, don’t panic.” The key is understanding what’s actually changed, what hasn’t, and what you can do about it now. This guide walks you through the real-world implications of the latest IHT changes and the inheritance tax planning and estate planning strategies that can help protect your family.

Key Takeaways

• The nil rate band (£325,000) and residence nil rate band (£175,000) remain frozen until at least April 2031 — a stealth tax increase that’s pulling hundreds of thousands more estates into IHT each year.
• From April 2027, inherited pensions will become liable for IHT for the first time — a major change affecting millions of pension holders.
• From April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped at 100% for the first £1 million of combined qualifying assets, then reduced to 50% relief on the excess — impacting family farms and businesses.
• Existing estate planning strategies must be reviewed urgently in light of these changes.
• Professional guidance from a specialist — not a generalist — is essential for navigating these reforms effectively.

Overview of Inheritance Tax in the UK

Before diving into the changes, it’s essential to understand how Inheritance Tax actually works in England and Wales. As Mike Pugh puts it: “England invented trust law 800 years ago — and IHT has been catching people out for almost as long.” Understanding the fundamentals is the foundation of effective inheritance tax planning and protecting your family’s wealth.

Current Tax Rates and Thresholds

IHT is charged at 40% on the value of a person’s estate above the nil rate band (NRB) of £325,000. This NRB has been frozen since 6 April 2009 — over 16 years without any increase. It’s now confirmed frozen until at least April 2031. In real terms, inflation has eroded its value enormously, which is the number one reason ordinary homeowners — not just the wealthy — are now caught by IHT.

In addition, the residence nil rate band (RNRB) provides an extra £175,000 per person — but only when a qualifying residential property is passed to direct descendants (children, grandchildren, or step-children). It is not available if you leave your home to nephews, nieces, siblings, friends, or charities. The RNRB also tapers away by £1 for every £2 your estate exceeds £2,000,000.

Both the NRB and RNRB are transferable between spouses and civil partners, giving a married couple a combined maximum of £1,000,000 (£650,000 NRB + £350,000 RNRB) before IHT applies. A reduced rate of 36% applies if you leave 10% or more of your net estate to charity.

With the average home in England now worth around £290,000, a single homeowner with modest savings and a pension can easily exceed the £325,000 threshold. For couples, the combined thresholds offer more breathing room — but only if everything is structured correctly.

Historical Context of Inheritance Tax

Inheritance Tax in its current form was introduced in 1986, replacing Capital Transfer Tax. However, some form of death duty has existed in the UK since 1694. The tax has been reformed repeatedly over the centuries to reflect changing economic conditions and government priorities.

The most significant recent development has been the prolonged freeze on the nil rate band since 2009. When the NRB was set at £325,000, the average UK house price was around £150,000. Today it’s closer to £270,000 nationally and around £290,000 in England. This “fiscal drag” — where frozen thresholds fail to keep pace with asset values — has quietly pulled tens of thousands more families into the IHT net each year. HMRC collected a record £7.5 billion in IHT receipts in 2023/24, and that figure continues to climb. Understanding this trend is essential for anticipating what comes next.

Importance of Understanding Inheritance Tax

Many people assume IHT is a problem only for the very wealthy. That hasn’t been true for years. With frozen thresholds and rising property values, a couple owning a home worth £400,000 with £200,000 in savings and pensions could face a significant IHT bill — even after using both nil rate bands. Once pensions are brought into scope from April 2027, the picture becomes even more challenging for ordinary families.

Understanding how IHT works — including the available reliefs, exemptions, and the 7-year rule for gifts — empowers you to make informed decisions. As Mike says, “Trusts are not just for the rich — they’re for the smart.” The difference between a family that plans ahead and one that doesn’t can be tens or even hundreds of thousands of pounds.

Working with a specialist inheritance tax planner — not a generalist solicitor or your bank — ensures you get advice tailored to your specific circumstances. As Mike often puts it, “The law — like medicine — is broad. You wouldn’t want your GP doing surgery.”

Key Proposals in the 2025 Budget

The Autumn Budget 2024 (delivered October 2024) and the Spring Statement 2025 confirmed several major changes to IHT that will take effect over the coming years. Here’s what you need to know.

Changes to Tax Thresholds

The most impactful change is the extended freeze on both the nil rate band and residence nil rate band. Originally frozen until April 2028, the government has now confirmed both thresholds will remain frozen until at least April 2031. That means the NRB will have been stuck at £325,000 for over 22 years by the time any increase might occur.

Key Points:

• The nil rate band remains at £325,000 — unchanged since April 2009 — and will not increase until at least April 2031.
• The residence nil rate band remains at £175,000, also frozen until at least April 2031, with the same restrictions (direct descendants only, taper above £2 million estates).
• With property prices and asset values continuing to rise, HMRC estimates that tens of thousands of additional estates will be drawn into IHT each year purely through fiscal drag.

Adjustments to Tax Rates

The headline IHT rate of 40% has not changed. However, two major new provisions will significantly expand IHT’s reach:

Inherited pensions (from April 2027): For the first time, unused pension funds and death benefits will be brought within the scope of IHT. Currently, pensions sit outside your estate for IHT purposes — making them one of the most powerful planning tools available. From April 2027, this advantage disappears for most people. If you’ve been relying on your pension as a tax-efficient way to pass on wealth, this change demands an urgent review of your plans.

Agricultural and Business Property Relief (from April 2026): APR and BPR — which currently provide 100% relief from IHT on qualifying agricultural and business assets — will be capped. The first £1 million of combined agricultural and business property will still receive 100% relief, but anything above that will only receive 50% relief. For family farms and businesses worth significantly more than £1 million, this represents a substantial increase in IHT exposure.

For individuals and families planning their financial legacy, these changes represent the most significant expansion of IHT in a generation. Effective inheritance tax planning has never been more important.

New Exemptions and Allowances

The budget also confirmed the shift from a domicile-based to a residency-based system for determining IHT liability on overseas assets. Under the new rules, individuals who have been UK tax resident for at least 10 of the previous 20 tax years will be liable for IHT on their worldwide assets — regardless of their domicile status. This replaces the old “deemed domicile” concept.

What this means in practice:

1. Long-term UK residents who previously relied on non-domiciled status to shield overseas assets from IHT will now be caught.
2. There is a transitional period for existing non-doms, but the direction of travel is clear: if you live in the UK long-term, HMRC wants IHT on everything you own, worldwide.

It’s worth noting that no new reliefs or increased allowances have been introduced to offset these changes. The annual gift exemption remains at just £3,000 per year — unchanged since 1981. The existing exemptions (small gifts of £250 per recipient, wedding gifts, normal expenditure out of income, and the 7-year rule for Potentially Exempt Transfers) all remain in place, but none have been increased.

As these changes take effect over 2025-2027, it’s essential to review your estate plan and consider how they impact your financial legacy. Seeking specialist advice now — before the changes bite — is the smartest move you can make.

Impacts of the Proposed Changes

These aren’t theoretical policy adjustments — they will have a direct, measurable impact on wealth transfer and family financial security across the UK. Let’s look at who’s affected and how.

Effect on Individuals and Families

The continued freeze on thresholds combined with new pension and agricultural changes means more families than ever will be caught by IHT. Consider this: a couple with a home worth £400,000, savings of £150,000, and combined pensions of £300,000 currently have an estate of £550,000 for IHT purposes (pensions excluded). From April 2027, their estate value for IHT jumps to £850,000 — putting them well above the combined NRB of £650,000 and potentially into IHT territory even with the RNRB.

This is a game-changer for millions of ordinary families who never thought IHT was their problem.

Key Considerations for Individuals and Families:

• Review your estate value including pensions — the post-April 2027 picture may look very different from today
• Explore legitimate planning strategies such as lifetime trusts, gifting, and life insurance trusts to mitigate IHT exposure
• Seek specialist advice from a dedicated inheritance tax planner — not a generalist solicitor or your bank’s “free” estate planning service

Implications for Wealth Distribution

The frozen thresholds create a ratchet effect: each year, more estates cross the IHT threshold simply because asset values rise while the nil rate band stays the same. The Office for Budget Responsibility has projected that IHT receipts will continue to rise sharply, reaching over £9 billion annually by 2028/29.

For families, this means that more of what parents and grandparents worked a lifetime to build will go to HMRC rather than their children. Between 40,000 and 70,000 homes are already sold every year to fund care costs — and IHT bills add another layer of financial pressure that can force property sales.

The following table illustrates the key threshold positions before and after the latest budget changes:

Regional Variations in Impact

The impact will not be felt equally across the country. In London and the South East, where average property prices are significantly higher, more estates will exceed the thresholds. But this isn’t just a London problem anymore. With the average home in England worth around £290,000, even homeowners in the Midlands, the North, and Wales are increasingly at risk — especially when you add savings, investments, and (from 2027) pensions to the equation.

Areas with higher property values will see a more pronounced impact from the continued freeze, while the pension changes will affect families everywhere regardless of location. Rural communities face particular challenges from the APR changes, where family farms that have been passed down for generations may now face significant IHT bills for the first time.

Comparative Analysis: Inheritance Tax in Other Countries

It’s useful to understand how other countries approach inheritance taxation, though it’s important to remember that each system reflects different legal traditions, economic structures, and policy objectives. What works elsewhere won’t necessarily translate directly to the UK.

Inheritance Tax in Europe

European countries take widely varying approaches. Some, like Sweden and Norway, have abolished inheritance tax entirely. Others, like France and Germany, maintain progressive systems with significantly more generous allowances for close family members than the UK provides.

One notable contrast: Germany gives each child a €400,000 (approximately £340,000) allowance that renews every 10 years, on top of a spousal allowance of €500,000. The UK’s £325,000 nil rate band must cover the entire estate — all beneficiaries — and hasn’t been increased since 2009. The UK’s annual gift exemption of just £3,000 hasn’t changed since 1981, while many European countries offer far more generous lifetime gifting provisions.

Inheritance Tax in the United States

The US operates a federal estate tax system — technically different from inheritance tax in that it taxes the estate rather than the recipient. The current federal exemption is approximately $13.6 million per person (around £10.8 million), meaning that only very wealthy estates pay federal estate tax. This makes the US system far more generous to ordinary families than the UK’s.

However, some US states impose their own estate or inheritance taxes with lower thresholds, and the US exemption is scheduled to roughly halve in 2026 unless Congress acts to extend it. The US system also involves a different legal framework — with probate being significantly more expensive and time-consuming than in England and Wales, where the process is administratively more straightforward.

Lessons from Global Practices

The most relevant lesson for UK families is this: while some countries have moved away from taxing inherited wealth, the UK is moving in the opposite direction — expanding IHT’s scope through frozen thresholds, pension inclusion, and reduced business reliefs. Waiting and hoping for reform is not a strategy.

The practical takeaway is that tax-efficient inheritance planning — using legitimate tools like lifetime trusts, gifting strategies, and life insurance trusts — is more important in the UK than in many comparable countries. Working with a specialist inheritance tax planner who understands the specific tools available under English and Welsh law is essential for protecting your family’s wealth.

Arguments For and Against Inheritance Tax

The debate around IHT is one of the most emotive in UK politics. Understanding both sides helps put the planning conversation in context — and reinforces why taking action matters regardless of your view on the tax itself.

Support for the Tax as a Revenue Source

Proponents argue that IHT serves as a necessary revenue source and helps address wealth concentration. IHT raised approximately £7.5 billion for the Treasury in 2023/24, funding public services. Supporters contend that taxing inherited wealth — which the recipient hasn’t earned — is fairer than increasing taxes on income or consumption.

Key arguments in favour:

Criticisms Regarding Fairness

Critics — and this includes most ordinary families who encounter IHT — argue that it represents double taxation. The assets being passed on were accumulated from income that was already taxed, from property on which stamp duty and council tax were paid, and from investments on which capital gains tax was charged. To then take 40% on death feels, to many, fundamentally unfair.

There’s also the practical unfairness of frozen thresholds. When the NRB was set at £325,000 in 2009, it was designed to affect only the wealthiest estates. Sixteen years of inflation and property price growth have turned it into a tax on ordinary homeowners — particularly in southern England but increasingly across the whole country. As Mike Pugh often points out, “Keeping families wealthy strengthens the country as a whole.”

Perspectives from Political Parties

Historically, IHT has been a dividing line in UK politics. Conservative governments have traditionally favoured higher thresholds or abolition (the promise to raise the NRB to £1 million was a notable 2007 conference pledge that was never delivered). Labour governments have tended to view IHT as a legitimate tool for revenue and redistribution. The current government’s approach — expanding scope through frozen thresholds and new pension rules rather than increasing headline rates — represents a politically pragmatic middle ground that raises more revenue without the headline of a “rate increase.”

Regardless of which party is in power, the direction of travel over the past 16 years has been clear: IHT is catching more people, raising more money, and showing no signs of becoming less aggressive. Planning around it isn’t a political statement — it’s financial common sense.

Planning for Changes: Strategies for Individuals

With these changes either already confirmed or coming into effect over the next two years, the time to act is now — not after the changes hit. Here are the practical strategies that actually work under English and Welsh law.

Tax-efficient Estate Planning

Effective estate planning in 2025 means going beyond just having a will. A will alone doesn’t reduce IHT — it simply directs where your assets go. To actually reduce the IHT bill, you need to use the legitimate planning tools that English trust law has provided for over 800 years.

Key strategies for tax-efficient estate planning include:

• Lifetime trusts: Placing your home or other assets into an irrevocable discretionary trust can remove them from your estate for IHT purposes. Mike Pugh’s Family Home Protection Trust (Plus) is specifically designed to protect the family home while retaining the residence nil rate band — something many generic trust products fail to do.
• Life insurance trusts: If you have life insurance, writing the policy into trust ensures the payout goes directly to your beneficiaries without being added to your estate (and taxed at 40%). This is typically free to arrange and is one of the simplest, most effective IHT planning steps available.
• Reviewing your will: Ensure your will is up to date and structured to maximise available reliefs — including the RNRB. Many existing wills were drafted before the RNRB existed and may inadvertently forfeit this valuable allowance.

Importance of Professional Advice

With the complexity of the latest changes — particularly around pensions and agricultural property — generic advice is not enough. You need a specialist who deals with inheritance tax planning day in, day out.

A specialist inheritance tax planner can help with:

• Running a comprehensive threat analysis on your estate (MP Estate Planning uses its proprietary Estate Pro AI system to identify all 13 potential threats to your wealth)
• Structuring trusts correctly to ensure they achieve genuine IHT savings — not all trusts are created equal, and a poorly drafted trust deed can be worse than no trust at all
• Navigating the pension changes coming in April 2027 and advising on whether restructuring pension death benefits or drawing down differently makes sense for your situation

Gifting Strategies Ahead of the Budget

Gifting remains one of the most straightforward ways to reduce your estate, but it must be done correctly to be effective. Under the 7-year rule, gifts to individuals (known as Potentially Exempt Transfers or PETs) fall completely outside your estate if you survive for seven years. Taper relief reduces the IHT rate on gifts made 3-7 years before death — but critically, taper relief only applies where the total value of gifts exceeds the nil rate band of £325,000. It is also important to note that transfers into discretionary trusts are not PETs — they are Chargeable Lifetime Transfers (CLTs), which attract an immediate 20% charge on any value above the available nil rate band at the time of transfer.

Practical gifting strategies to consider:

• Use your annual exemptions: £3,000 per year (with one year’s carry-forward if unused), plus £250 small gifts per recipient (though the £250 and £3,000 exemptions cannot be combined for the same person). A couple can give away £6,000 per year just using the annual exemption — and this is immediately outside the estate with no 7-year wait.
• Normal expenditure out of income: If you can demonstrate a regular pattern of giving from surplus income (not capital), these gifts are immediately exempt from IHT with no 7-year rule or annual limit. This must be properly documented — keep records of your income, outgoings, and the pattern of gifts.
• Gifting assets expected to grow in value: Gifting appreciating assets sooner rather than later means the future growth happens outside your estate. This is particularly relevant for property or investment portfolios.
• Be aware of Gift with Reservation of Benefit rules: If you give away an asset but continue to benefit from it (for example, giving your home to your children but continuing to live in it rent-free), HMRC treats the asset as still in your estate — even if you survive seven years. Proper trust structures, such as Mike’s Gifted Property Trust, are designed to navigate these rules correctly while starting the 7-year clock.

By taking proactive steps now, you give yourself the best chance of protecting your family’s wealth from the expanding reach of IHT. The cost of setting up a trust — from £850 for straightforward arrangements — is a fraction of what IHT could take from your estate. When you compare it to the potential 40% tax bill, or even to the average cost of residential care at £1,200-£1,500 per week, it’s one of the most cost-effective forms of financial protection available.

Potential for Legal Challenges

Major tax reforms invariably face scrutiny, and the latest IHT changes are no exception. Understanding the potential for legal challenges helps put these reforms in context.

Historical Precedents in Taxation Challenges

Tax legislation in the UK has been challenged through the courts on numerous occasions. The Human Rights Act 1998 and the European Convention on Human Rights provide grounds for challenging tax provisions that are discriminatory or disproportionate. Previous IHT-related challenges have focused on issues such as the treatment of unmarried couples (who cannot transfer unused nil rate bands between them, unlike married couples and civil partners) and the discriminatory impact of certain reliefs.

The APR and BPR changes have already generated significant political opposition, particularly from farming communities. The National Farmers’ Union has mounted a vocal campaign arguing that the cap will force the sale of family farms that have been in families for generations. Whether this opposition translates into formal legal challenges remains to be seen.

Current Legal Framework

Challenges to tax legislation in the UK typically proceed through the First-tier Tribunal (Tax Chamber), Upper Tribunal, and potentially the Court of Appeal and Supreme Court. HMRC decisions can be challenged through formal dispute resolution procedures, and judicial review is available for broader challenges to the legality of tax provisions.

For individuals, the practical focus should be less on hoping for legal challenges to overturn the changes and more on planning effectively within the rules as they exist. A specialist inheritance tax planner can help you understand the IHT implications of the new rules and structure your affairs accordingly — regardless of whether any provisions are subsequently challenged.

Possible Outcomes of Future Disputes

Any successful legal challenges could potentially result in modifications to how the new rules are applied, transitional provisions for those already caught, or adjustments to specific thresholds. However, fundamental changes to IHT rates or the threshold freeze are unlikely to come through the courts — these are political decisions that would require legislative change.

For those involved in wealth transfer planning, the practical lesson is clear: plan on the basis of the law as it stands, not as you hope it might change. If the rules are subsequently relaxed, you’ll be in an even better position. If they’re tightened further — as the historical trend suggests — you’ll be glad you acted when you did.

Public Opinion on Inheritance Tax Reforms

Understanding public attitudes to IHT is important context, both because it influences policy and because it reflects the real-world concerns of the families these changes affect.

Recent Surveys and Polls

Polling consistently shows that IHT is one of the most disliked taxes in the UK, despite being paid by a relatively small (but rapidly growing) proportion of estates. Key findings from recent research include:

• YouGov polling has consistently found that a majority of the British public considers IHT unfair, with respondents frequently citing the “double taxation” argument — that assets have already been taxed during the owner’s lifetime.
• Research from the Institute for Fiscal Studies (IFS) shows that while relatively few estates currently pay IHT, the number is rising sharply each year due to frozen thresholds, and public awareness of this trend is increasing.

Influencing Factors in Public Sentiment

Several factors shape how people feel about IHT:

1. Property ownership: Homeowners are significantly more likely to view IHT negatively than non-homeowners. With home ownership still above 60% in the UK, this creates a large constituency opposed to the tax.
2. Perception vs reality: Many people overestimate their IHT exposure, while others underestimate it. The pension changes from April 2027 are likely to create a new wave of concern as people realise their retirement savings are now in scope.
3. Intergenerational fairness: Younger generations who face significant barriers to home ownership (high prices, deposits, mortgage rates) may view inheritance as crucial to their financial future — making IHT feel like a direct threat to their prospects.

Role of Media in Shaping Views

Media coverage of IHT tends to be polarised. Tabloid coverage often focuses on emotive stories of families forced to sell homes, while broadsheet analysis typically examines the revenue and distributional arguments. Social media has added a new dimension, with platforms like YouTube (where MP Estate Planning publishes regular educational content) allowing specialists to explain IHT directly to the public in plain English — cutting through both the political spin and the financial industry’s jargon.

As the 2027 pension changes approach, expect media attention on IHT to intensify. For individuals, the key is to look past the headlines and understand how the rules actually work — and what you can do about them through proper inheritance tax planning.

Insights from Tax Experts and Financial Advisers

The complexity of the recent IHT changes means that specialist guidance is more valuable than ever. Here’s what the professional community is advising.

Perspectives from Leading Tax Specialist Firms

Leading tax and estate planning specialists are united on one point: the scope of IHT is expanding, not contracting, and waiting to act is the biggest risk most families face. Key themes emerging from professional commentary include:

The pension changes represent the single biggest expansion of IHT in decades. Families who have structured their finances around the assumption that pensions sit outside the estate need to urgently review their arrangements before April 2027.

The APR/BPR changes, while targeted at agricultural and business assets, signal a broader willingness by the government to reduce long-standing reliefs. No relief should be considered permanently “safe.”

Advice from Financial Planners

Financial planners stress that a “whole estate” review is now essential — not just looking at property or savings in isolation, but considering the combined impact of property, savings, investments, pensions, and life insurance. The April 2027 pension change in particular means that what was previously an IHT-free asset class becomes fully taxable.

Key practical advice from specialists includes:

• Don’t assume your existing plan still works. Wills and trust deeds drafted even 5 years ago may not account for the pension changes or the extended threshold freeze.
• Consider life insurance in trust. If the pension changes will push your estate over the threshold, a life insurance policy written into trust can provide your family with funds to cover the IHT bill without touching the underlying estate assets.
• Start gifting strategically. The 7-year clock for Potentially Exempt Transfers means that gifts made today could be fully outside your estate by 2032 — but only if you start now.

Key Considerations for Future Changes

The direction of travel is clear: IHT is raising more revenue each year, and the government has shown a willingness to expand its scope. Specialist inheritance tax planners recommend:

• Annual reviews of your estate plan to adapt to legislative changes
• Utilising tax-efficient inheritance strategies such as discretionary lifetime trusts, life insurance trusts, and structured gifting
• Staying informed about further policy developments — particularly around any changes to trust taxation or the annual gift exemption

As Mike Pugh says, “Not losing the family money provides the greatest peace of mind above all else.” Taking a proactive, informed approach is the best protection against an increasingly aggressive IHT regime.

The Role of Trusts in Inheritance Tax Planning

Trusts are the cornerstone of effective inheritance tax planning in England and Wales — and have been for over 800 years. A trust is a legal arrangement (not a separate legal entity) where trustees hold legal ownership of assets for the benefit of named beneficiaries. Crucially, because the assets are held by the trustees rather than the individual, they can — if properly structured — sit outside the settlor’s estate for IHT purposes.

Types of Trusts and Their Benefits

Under English and Welsh law, the primary classifications of trusts are:

• Discretionary Trusts: The most commonly used type for IHT and asset protection planning — accounting for the vast majority of trusts created for estate planning purposes. Trustees have absolute discretion over how and when to distribute income and capital to beneficiaries. No beneficiary has an automatic right to anything — which is precisely what provides protection against IHT, care fee assessments, divorce, and bankruptcy. Discretionary trusts can last up to 125 years under current legislation.
• Interest in Possession Trusts: An income beneficiary (life tenant) has the right to receive income or use of trust property during their lifetime. When that interest ends, the capital passes to the remainderman (capital beneficiary). These are commonly used in will trusts to prevent sideways disinheritance — for example, ensuring a surviving spouse can live in the family home for life, with the property ultimately passing to the children of the first marriage. It’s worth noting that interest in possession trusts created after March 2006 are generally treated under the relevant property regime for IHT, unless they qualify as an immediate post-death interest (IPDI) or a disabled person’s interest.
• Bare Trusts: The simplest form — the beneficiary has an absolute right to the trust assets at age 18 (16 in Scotland). The trustee is merely a nominee. Bare trusts offer no IHT efficiency, no protection against care fees, and no protection against the beneficiary’s divorce or bankruptcy. Under the principle in Saunders v Vautier, the beneficiary can collapse the trust once they reach majority. We rarely recommend bare trusts for estate planning purposes.

The key point is that for genuine IHT planning and asset protection, irrevocable discretionary trusts are the gold standard. A revocable trust provides no IHT benefit because HMRC treats the assets as still belonging to the settlor (a settlor-interested trust). Mike Pugh’s trusts use “standard and overriding powers” that give trustees clearly defined flexibility without making the trust revocable — an important distinction that many generalist advisers fail to understand.

How Trusts Can Mitigate IHT

When assets are properly transferred into an irrevocable discretionary trust, they are removed from the settlor’s estate for IHT purposes. This is because the settlor no longer owns the assets — the trustees do. For most families putting their home into trust, if the value is under £325,000 (or £650,000 for a married couple using two trusts), there is no entry charge at all.

The ongoing tax costs of a discretionary trust are often far less than people fear. Under the relevant property regime, the 10-year periodic charge is a maximum of 6% of trust property above the nil rate band — and for most family homes that are below the NRB, this charge is zero. Exit charges are proportional to the last periodic charge, so if the periodic charge was nil, the exit charge will be nil too.

Trusts also bypass probate entirely. When the settlor dies, there is no need to wait for a Grant of Probate — trustees can act immediately. This means beneficiaries aren’t left waiting months with frozen bank accounts and unsellable property while the probate process runs its course. During probate, all sole-name assets are frozen, and the will becomes a public document once the Grant is issued. Trust assets avoid both problems entirely.

For more detailed information on how trusts are treated for inheritance tax, you can refer to our technical update on Inheritance Tax on Trusts.

Setting Up Trusts: What to Know

Setting up a trust is a serious legal step that requires specialist expertise. Key considerations include:

• Choose the right type of trust: A Family Home Protection Trust (Plus), a Gifted Property Trust, a Settlor Excluded Asset Protection Trust, or a Life Insurance Trust will each achieve different objectives. The right choice depends on your specific circumstances — what works for a couple looking to protect their family home will be different from what’s needed for buy-to-let properties or business assets.
• Ensure the trust deed is properly drafted: The trust deed is the foundation document that governs everything. A poorly drafted trust deed can render the whole arrangement ineffective — or worse, create unintended tax consequences.
• Register with the Trust Registration Service (TRS): All UK express trusts — including bare trusts — must be registered with HMRC’s TRS within 90 days of creation. This is a legal requirement under the 5th Money Laundering Directive. Importantly, the TRS register is not publicly accessible (unlike Companies House), so your family’s affairs remain private.
• Understand the property transfer process: For property without a mortgage, a TR1 form transfers legal title to the trustees, and a Form RX1 places a restriction on the title at Land Registry. Where there’s a mortgage, a Declaration of Trust transfers the beneficial interest while legal title remains with the mortgagor (because the lender’s consent would be needed for a full transfer). As the mortgage is paid down and the property value rises, the growth accumulates inside the trust. This distinction between legal and beneficial ownership is the foundation of English trust law.

The cost of setting up a trust — from £850 for straightforward arrangements — should be weighed against the potential IHT saving. A 40% tax bill on a £300,000 home above the nil rate band could cost your family £120,000. The trust pays for itself many times over. Mike Pugh is the first and only company in the UK that actively publishes all prices on YouTube — so you know exactly what you’re getting before you pick up the phone.

Future Outlook for Inheritance Tax Policy

Looking beyond the immediate changes, the trajectory of UK IHT policy gives us important clues about what may come next — and why acting now is better than waiting.

Predictions for Further Reforms

Based on current trends and government revenue requirements, we anticipate:

• Continued threshold freezes beyond 2031. There is little political incentive for any government to voluntarily reduce IHT revenue by raising thresholds. The stealth tax approach has proven effective at raising revenue without the backlash of headline rate increases.
• Further restrictions on reliefs. The APR/BPR changes signal a willingness to cap or reduce long-standing reliefs. Future targets could include the residence nil rate band (which is already complex and limited to direct descendants) or changes to the 7-year rule for PETs.
• Possible changes to trust taxation. Trusts are periodically reviewed by HMRC and the Treasury. While there is no current proposal to change the relevant property regime, any future tightening of trust rules would reinforce the value of having trusts already established under today’s rules.

The Role of Economic Factors

Several economic factors will influence the future of IHT policy:

Potential Policy Shifts Post-2025

The most likely scenario is not a dramatic overhaul of IHT but a continued tightening through incremental changes — freezing thresholds, expanding scope (as with pensions), and reducing reliefs (as with APR/BPR). This “boiling frog” approach is politically easier than headline changes and is already proving highly effective at raising revenue.

For families, the implication is clear: the earlier you put planning in place, the more effective it will be. Trusts established now benefit from today’s rules. Gifts made now start the 7-year clock running. Waiting for “the right time” typically means paying more tax than you needed to.

As Mike Pugh puts it: “Plan, don’t panic.” But do plan — and do it now.

Conclusion: Preparing for the 2025 Budget Changes

The IHT changes confirmed in the Autumn Budget 2024 and Spring Statement 2025 represent the most significant expansion of inheritance tax in a generation. The combination of frozen thresholds (until at least 2031), pension inclusion (from 2027), and reduced business and agricultural reliefs (from 2026) means that more families will pay more IHT than ever before.

Key Considerations

The headline IHT rate hasn’t changed — but the effective tax burden has increased substantially through fiscal drag and expanded scope. Families who thought they were “under the threshold” need to recalculate, particularly once pensions are included. The nil rate band at £325,000 and the residence nil rate band at £175,000 will not increase for at least another six years. Consulting a specialist inheritance tax planner — not a generalist — is essential for understanding your specific exposure and options.

Actionable Steps

To prepare for these changes, consider the following steps:

• Calculate your total estate value including property, savings, investments, and (from 2027) pensions. Use this to assess your IHT exposure.
• Review your existing will and any trusts to ensure they still achieve what you intended in light of the changes.
• Consider placing your home into a lifetime trust to remove it from your estate for IHT purposes while retaining the protection it provides against care fees, divorce, and probate delays.
• Write any life insurance policies into trust — this is often free to arrange and prevents the payout from being added to your taxable estate.
• Begin gifting strategically to start the 7-year clock and use your annual exemptions.
• Book a consultation with a specialist who can run a comprehensive threat analysis on your estate and recommend the right combination of planning tools for your situation.

Future-Proofing Estates

The direction of IHT policy is clear — more scope, frozen thresholds, fewer reliefs. Trusts established now, gifts made now, and plans put in place now will be more effective than waiting for changes that may never come. Regular reviews of your estate plan — ideally annually — ensure it adapts to new legislation and continues to work as intended.

Trusts are not just for the rich — they’re for the smart. And in 2025, being smart about inheritance tax has never mattered more.

Want to protect your family from the expanding reach of inheritance tax?

Book your free consultation with an inheritance tax planning specialist →