Inheritance Tax and Lifetime Allowance: Understanding the 2024–2027 Reforms
- Neil Robbirt
- Aug 7
- 6 min read
Updated: 22 hours ago
Recent government figures show that Inheritance Tax (IHT) collections jumped by £200 million, reaching £3.1 billion between April and July 2025—up 6.9% from the year before—a clear sign of fiscal drag, as asset values outpace frozen tax thresholds.
Even without new legislation, more estates are falling subject to IHT because the nil-rate band (currently £325,000) has been unchanged since 2009, and the residence nil-rate band, introduced in 2020, remains at £175,000, despite rising property prices.
Looking ahead:
Business Property Relief and Agricultural Relief will be reduced from April 2026, potentially increasing the tax burden on estates with such assets.
Starting April 2027, unused pension funds and death benefits will be counted toward your estate’s value for IHT purposes.
These changes make careful planning essential. Speak to one of our experts for guidance on structuring your estate effectively.
The New “14-Year Gift Rule” — What You Must Know
Traditionally, gifts become IHT-free if the giver survives them by seven years. But a recent revelation shows there's a lesser-known caveat: the “14-year rule” for gifts into trusts.
If you make a chargeable lifetime gift (CLT) into a trust within seven years before making an exempt gift (PET), HMRC may revisit the trust gift going back 14 years to assess tax. In other words, timing and structuring of trust gifts require extreme care.
Evolving Rules on Lifetime Gifts: Caps on the Horizon?
Live policy discussions suggest the government may impose:
Lifetime caps on gifts, beyond which they’d attract IHT even if given during your lifetime.
Changes to the 7-year taper relief system.
Tightening of existing annual gift exemptions.
These are not official yet—but the speculation alone has driven a surge in financial planning activity.
A Shift in IHT Scope for Long-Term Residents & Trusts
Starting 6 April 2025, the conception of “domicile” for IHT purposes is being replaced for non-UK assets. A new long-term resident test applies: you become liable to IHT on your worldwide assets if you’ve lived in the UK for 10 of the previous 20 years.
Further detail:
Non-UK assets will remain taxed for a “ten-year tail” even after you stop being a long-term resident.
Settlements into trusts may lose "excluded property" status once you're deemed long-term resident, exposing them to IHT and 10-year trust charges of up to 6%.
Inheritance Tax Forecasts — Expect Rising Revenue
IHT receipts are projected to keep climbing:
Estimated £9.1 billion in 2025/26, surging to £14 billion by 2029/30 due to rising asset values and frozen thresholds.
Even before new reliefs take effect, IHT is already ballooning. Once pension inclusion and relief cuts hit, liability risks for estates could grow steeply.
Speak to one of our experts for guidance on mitigating future IHT exposure.
Pensions & Lifetime Allowance: A Key Tax-Free Shift
Abolition of the Lifetime Allowance (LTA)
On 6 April 2023, the penalty for exceeding the Lifetime Allowance (LTA)—formerly capped at £1,073,100—was removed. By 6 April 2024, the LTA was completely abolished.
In its place, three new allowances were introduced:
Lump Sum Allowance (LSA)
Lump Sum and Death Benefit Allowance (LSDBA)—set at the previous LTA level.
Overseas Transfer Allowance
Implications
Most pension benefits taken after April 2024 won’t be tested against an overall cap.
But tax-free lump sums and death benefits may still be subject to allowances.
Transitional relief applies for those who had protected allowances from pre-2024 crystallised pensions.
Why This Matters for Tax Planning
With pensions increasingly falling under IHT from 2027, and the LTA abolished, your pension strategy needs reassessment.
Death benefits and lump sums may be taxable under LSDBA if not managed correctly.
Ensuring you or your beneficiaries stay within or utilize the new allowances can minimise tax exposure both during life and at death.
Practical Strategies for Managing Inheritance Tax
With IHT thresholds frozen and changes looming, planning ahead is more critical than ever. Below are strategies individuals and families are using to manage exposure.
1. Use Annual Exemptions Wisely
Each tax year you can gift £3,000 free of IHT, plus carry forward unused allowance from the previous year.
Small gifts of up to £250 per person are also exempt.
2. Leverage the 7-Year Rule (While It Lasts)
Most gifts (Potentially Exempt Transfers, or PETs) become tax-free if you survive 7 years.
Taper relief reduces the tax bill on gifts made more than 3 years before death.
Watch the 14-year rule if trusts are involved.
3. Consider Trusts—But With Care
Trusts remain a valuable tool, but rule changes mean their tax treatment may shift.
Trusts created while you’re still considered a non-resident may retain excluded property status—but that advantage may disappear if you become a long-term resident.
4. Make Use of the Residence Nil-Rate Band
Passing on the family home to direct descendants unlocks an additional £175,000 allowance.
Combined with the nil-rate band, this can shelter up to £500,000 per person (or £1 million for married couples).
5. Review Business and Agricultural Reliefs
From April 2026, Business Property Relief and Agricultural Relief are being reduced.
If you own qualifying assets, consider transferring or restructuring before these changes bite.
Pension Strategies After Lifetime Allowance Abolition
With the LTA abolished and replaced by new allowances, pension planning needs a reset.
Speak to one of our experts for tailored strategies to optimise your pension in the post-LTA landscape.
Key Allowances
Lump Sum Allowance (LSA): Limits tax-free cash you can take during your lifetime.
Lump Sum and Death Benefit Allowance (LSDBA): Caps how much can be paid tax-free as lump sums to beneficiaries.
Overseas Transfer Allowance: Governs transfers to Qualifying Recognised Overseas Pension Schemes (QROPS).
What This Means in Practice
For most savers, pensions are now even more attractive as a retirement vehicle—no LTA charge, and contributions can grow tax-free.
However, from April 2027, unused pensions will form part of your estate for IHT purposes. This creates a trade-off: pensions are now more flexible, but less protected against estate tax.
Actions to Consider
Review drawdown plans: It may be better to use pension funds earlier, reducing what remains in your estate.
Blend pensions with ISAs: ISAs are IHT-liable, but using them during your lifetime may allow pensions to pass efficiently (before 2027).
Nomination forms: Always keep death benefit nominations updated with your provider to ensure payments align with your wishes and allowances.
The Changing Role of Pensions in IHT Planning
Previously, pensions were a go-to way of passing wealth tax-free. After 2027, that picture changes.
Key points:
Pensions will no longer automatically sit outside your estate.
Beneficiaries could face IHT charges on funds left unused.
The interaction between pension allowances and IHT rules means professional advice is now essential for high-value estates.
FAQs: Inheritance Tax and Lifetime Allowance Rule Changes
Will inheritance tax thresholds rise soon?
Currently, both the nil-rate band (£325,000) and residence nil-rate band (£175,000) are frozen until 2028. With property values rising, more estates are being pulled into IHT.
Can I still pass on my pension tax-free?
Until April 2027, yes—pensions are outside of IHT. After that date, unused pension funds and death benefits will count toward your estate.
Does abolishing the Lifetime Allowance mean no limits on pensions?
No. The overall LTA is gone, but new limits apply to tax-free lump sums and death benefits. Breaching these could trigger income tax charges.
Should I give away assets now?
It depends on your circumstances. Gifting early can lock in today’s exemptions and avoid future tax increases, but rules around gifts and trusts are tightening.
Do foreign assets count?
For long-term UK residents (10 of the previous 20 years), worldwide assets will fall into IHT scope. Even after leaving, there’s a 10-year tail of exposure.
Key Takeaways
IHT receipts are rising sharply, with thresholds frozen and reliefs being reduced.
The 14-year gifting rule is a hidden risk for those using trusts.
From April 2027, pensions will be drawn into the IHT net.
The Lifetime Allowance is abolished, but new allowances cap lump sums and death benefits.
Proactive planning is essential: gifting strategies, trust reviews, and pension drawdown plans all need revisiting.
Take the Next Step: Protect Your Estate and Pension from New Tax Rules
The recent changes to Inheritance Tax and the abolition of the Lifetime Allowance have reshaped how estates and pensions are treated. Frozen thresholds, reduced reliefs, and the inclusion of pensions in IHT from 2027 mean that navigating these rules without guidance could result in unnecessary tax liabilities.
That’s where professional advice makes a difference. An adviser can review your estate, assess how the new allowances affect your pension planning, and structure gifts, trusts, and withdrawals in the most tax-efficient way to safeguard your long-term financial objectives.
With the right planning, you can reduce exposure to IHT, make full use of pension allowances, and ensure your assets are transferred according to your wishes.