Finance Act 2026: what the inheritance tax changes mean for you

Last updated: May 2026.

What is the Finance Act 2026?

The Finance Act 2026 received Royal Assent in May 2026, becoming the law that gives effect to the inheritance tax (IHT) and pension changes announced in the October 2024 Autumn Budget. Different parts of the Act take effect at different times, most IHT changes apply from 6 April 2026, with the pension inclusion deferred until 6 April 2027.

This is the most consequential IHT reform in over a decade. The Office for Budget Responsibility estimates the package will raise the annual IHT take from around £8.7 billion in 2025/26 to over £14 billion by 2029/30, almost doubling the tax in five years.

At a glance: the three big changes

Change 1: Nil-rate bands frozen until 2030

The two main IHT allowances are unchanged in cash terms but extended in their freeze:

• Nil-rate band: £325,000 per person (frozen since 2009)
• Residence nil-rate band: £175,000 per person, where a main residence passes to direct descendants (frozen since 2020)
• Combined for a married couple/civil partnership: up to £1 million, where allowances are unused on first death
• Freeze extended: the previous government had planned to thaw these allowances in 2028. The Finance Act 2026 extends the freeze to April 2030.

The mechanism is what Treasury officials call fiscal drag. When allowances are frozen but asset values rise, more estates are gradually pulled into the tax. UK house prices alone are up around 25% over the period the allowances have been frozen, meaning many more estates now sit above the IHT threshold than the rules were originally designed for.

Change 2: Business and Agricultural Relief capped at £1 million

Before April 2026, Business Relief (BR, also known as Business Property Relief) and Agricultural Relief (AR) offered 100% IHT relief on qualifying assets, with no upper limit. From 6 April 2026, that 100% relief is capped at £1 million of combined qualifying assets per individual. Above the cap, only 50% relief applies, which means an effective 20% IHT rate on the excess.

Who this most affects:

• Family business owners with companies worth more than £1m, particularly second and third generation businesses where the value has grown
• Farmers with land holdings above the cap (a notable change after years of full agricultural relief)
• AIM portfolio investors using listed BR-qualifying shares for IHT planning

The £1m cap is per individual, not per couple, and crucially it is not transferable to a surviving spouse. Couples therefore have £2m of combined relief available if assets are held jointly, but planning is needed to make use of both allowances.

For more on how BR works in practice, see our AIM portfolios and Business Relief guide.

Change 3: Pensions brought into the IHT net from April 2027

The most consequential change for most families. From 6 April 2027, unused pension funds, primarily defined contribution (DC) pensions, will form part of your taxable estate for IHT purposes for the first time. The current rule (since pension freedoms in 2015) was that pensions sat entirely outside the IHT net, making them one of the most efficient assets to leave to beneficiaries.

From April 2027 the new position is:

• Unused DC pension pots become part of the deceased's estate at the date of death
• The pension provider must report the value to HMRC, and IHT becomes payable from the pension before the residual is paid to beneficiaries
• The spouse and civil partner exemption survives, pension passing to a spouse remains IHT-free
• The existing income tax treatment of inherited pensions also applies:
  • Death before age 75 → beneficiary withdrawals usually tax-free
  • Death from age 75 → beneficiary withdrawals taxed as their income

For someone dying after age 75 with a substantial unused pension passing to children, the combined effective tax rate can reach 64% or higher when both IHT (up to 40%) and beneficiary income tax (up to 45%) apply. We cover the mechanics in detail in our Pensions and IHT from April 2027 guide.

What about death-in-service benefits?

Lump sum death-in-service benefits paid from registered pension schemes will largely sit outside the new IHT regime, where they are paid at the discretion of scheme trustees. This preserves an important workplace benefit that many employees rely on for family protection.

Charity-direct payments from pensions will also remain IHT-free under the existing charity exemption.

Worked example: a typical mid-sized estate

Margaret, a widow aged 78, has the following assets at death (her late husband's allowances were fully used on first death):

Under the new rules, Margaret's taxable estate is around £1.35m (excluding the BR-protected AIM portfolio). After her own £325k NRB and £175k RNRB (assuming the residence passes to children), the taxable portion is around £850k. IHT at 40% = £340,000.

Under the pre-April-2027 rules, the £450k pension would have been outside the estate entirely, reducing taxable wealth by the same amount, meaning IHT of around £180,000. The pension inclusion alone changes the tax bill by £160,000 in this example.

What to think about now

The right response depends on your circumstances. For most families with material exposure, three areas are worth reviewing:

1. Pension drawdown sequencing

For the last decade, conventional planning has been to spend other assets first and leave the pension untouched for inheritance. From April 2027, that logic reverses for higher-value estates, spending the pension during retirement (paying income tax along the way) may be more efficient than leaving it to be hit by both IHT and beneficiary income tax. See our how pensions are taxed after death guide.

2. Lifetime gifting

Gifts become fully IHT-free after seven years. For people in good health with assets they don't need, accelerated gifting can shift value out of the estate. The £3,000 annual exemption, the gifts-out-of-normal-income exemption, and Potentially Exempt Transfers (PETs) all remain. See UK tax-efficient giving.

3. Business Relief planning

For families with business assets near or above the £1m cap, allocation between spouses and use of trusts may help maximise the combined £2m allowance. AIM portfolios remain a quicker route into BR (2 years vs 7) but carry real investment risk. See AIM portfolios and Business Relief.

What hasn't changed

For clarity, the Finance Act 2026 did not change:

• The 40% headline IHT rate
• The spouse and civil partner exemption (unlimited transfers between UK-domiciled spouses)
• The charity exemption (gifts to UK charities remain IHT-free; 10%+ to charity reduces the rate to 36%)
• The seven-year rule for lifetime gifts
• The £3,000 annual gift exemption and small gifts exemption
• Most existing trust regimes
• The Capital Gains Tax uplift on death

The timetable

Frequently asked questions

Sources and further reading

• gov.uk, Inheritance Tax
• HMRC, Inheritance Tax thresholds and rates
• Office for Budget Responsibility, Inheritance Tax forecasts
• gov.uk, Business Relief for Inheritance Tax
• Related: Pensions and inheritance tax from April 2027
• Related: AIM portfolios and Business Relief for IHT
• Related: How pensions are taxed after death