When advising clients on estate planning and wealth transfers, practitioners must navigate the statutory framework of the Inheritance Tax Act 1984 (IHTA 1984). Section 4 of IHTA 1984 dictates that on the death of any person, tax is charged as if, immediately before their death, they had made a transfer of value equal to the value of their estate at that time.
For the 2026/27 tax year, the government has frozen the primary thresholds until 2030. Section 7 of IHTA 1984 sets the standard Nil-Rate Band (NRB) at £325,000. Section 8D(5) sets the Residence Nil-Rate Band (RNRB) at £175,000, applicable when an interest in a home passes on death to direct descendants.
The RNRB tapers down by £1 for every £2 that the net value of the estate exceeds the £2 million taper threshold. Spouses and civil partners can transfer any unused proportion of these bands to the surviving partner’s estate, allowing a combined tax-free allowance of up to £1 million.
Table: 2026/27 Key IHT Rates & Thresholds
| Component | 2026/27 Limit / Rate | Statutory Authority |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | s 7 IHTA 1984 |
| Residence Nil-Rate Band (RNRB) | £175,000 | s 8D(5) IHTA 1984 |
| RNRB Taper Threshold | £2,000,000 | s 8D(5) IHTA 1984 |
| Standard Death Rate | 40% | Sch 1 IHTA 1984 |
| Reduced Rate (Charitable Giving) | 36% (if 10%+ to charity) | Sch 1A IHTA 1984 |
| Lifetime Chargeable Transfer Rate | 20% | s 7(2) IHTA 1984 |
The Shift to a Residence-Based System
Practitioners must actively apply the new residence-based system, which fully replaced the historical domicile-based regime from 6 April 2025. Under Schedule 13 to the Finance Act 2025, an individual falls into the scope of UK Inheritance Tax (IHT) on their worldwide assets if they qualify as a “long-term UK resident.
An individual who would otherwise be a long-term UK resident at any time in a given tax year... is treated for the purposes of IHTA 1984 as not being a long-term UK resident at that time if the individual… was resident in the United Kingdom for fewer than 15 of the 20 tax years immediately preceding the relevant tax year.”
An individual meets the long-term resident definition if they have been resident in the UK for at least 10 out of the last 20 tax years. Once they meet this test, they remain in scope for IHT for between 3 and 10 years after leaving the UK, capturing non-UK assets they subsequently place into settlements.
The £2.5m Cap on APR and BPR (Effective April 2026)
From 6 April 2026, the government aggressively restricts Agricultural Property Relief (APR) and Business Property Relief (BPR). Previously, qualifying assets received unlimited 100% relief. Now, the 100% rate for APR and BPR is strictly capped at a combined lifetime allowance of £2.5 million per individual.
Any qualifying agricultural or business asset value exceeding this £2.5 million threshold receives only a 50% relief, resulting in an effective IHT rate of 20% on the excess. Furthermore, the government has abolished the 100% BPR rate for unlisted shares held on recognised stock exchanges (such as AIM), replacing it with a flat 50% rate.
Future Planning: The 2027 Pension Inclusion
While advising clients in 2026/27, professionals must prepare estates for a major structural inclusion taking effect the following year. From 6 April 2027, unused pension funds and pension death benefits will be included within the deceased’s estate for Inheritance Tax purposes.
This change applies regardless of whether the pension scheme administrators possess relevant discretion over the payment of the death benefits. The standard IHT exemptions for death benefits passing to a surviving spouse, civil partner, or registered charity remain intact.
Consider researching the precise mechanical interaction between the £2.5 million APR/BPR cap and the valuation of trusts holding business property, as trusts receive their own separate £2.5 million allowance.
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