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The United Kingdom's inheritance tax (IHT) framework has remained relatively static for years, but the 2026/27 tax year is set to usher in some of the most significant reforms in a generation. For investors, business owners, and families planning their legacies, the "business as usual" approach to estate planning is no longer viable.
While the headline rate of inheritance tax remains at 40 per cent, the mechanisms that previously allowed large estates to pass on wealth tax-free—particularly through business and agricultural assets—are being fundamentally restricted following Rachel Reeves’ inheritance tax changes.
If you would like to understand more about your inheritance tax liability and the role EIS and SEIS tax relief can play in mitigating it, you can use our inheritance tax calculator here.
Under the rules prevailing until April 2026, most individuals have a tax-free allowance known as the nil-rate band (NRB) of £325,000. This is often supplemented by the residence nil-rate band (RNRB) of £175,000 when a main residence is passed to direct descendants, potentially allowing a couple to pass on £1 million entirely tax-free.
Beyond these thresholds, two critical reliefs have historically protected productive assets from being broken up to pay tax bills:
Business Property Relief (BPR): Offers up to 100 per cent relief on qualifying interests in a business or shares in unquoted trading companies (including those on the Alternative Investment Market, or AIM).
Agricultural Property Relief (APR): Offers up to 100 per cent relief on the agricultural value of land and buildings.
Until now, these reliefs were unlimited. Whether a business was worth £1 million or £100 million, it could often be passed to the next generation without an inheritance tax liability.
From 6 April 2026, the era of unlimited relief comes to an end. The government is introducing a combined cap on the 100 per cent relief available for BPR and APR.
Following significant consultation and a subsequent increase to the originally proposed limits, the government announced that individuals will now have a combined £2.5 million allowance for 100 per cent relief. For any qualifying assets exceeding this £2.5 million threshold, the relief will drop to 50 per cent.
Effectively, this means that the value of a business or farm above the cap will be taxed at an effective rate of 20 per cent (the 40 per cent headline rate applied to half the value). Crucially, this £2.5 million allowance is transferable between spouses and civil partners, meaning a couple could potentially protect up to £5 million of business or agricultural assets before the 20 per cent charge applies.
One of the most significant shifts in UK tax policy is the inclusion of "unused pension funds" within the inheritance tax (IHT) net, effective from 6 April 2027. This change, codified in the Finance Bill 2025-26, removes the long-standing "pension loophole" that allowed individuals to use their retirement pots as a tax-free vehicle for intergenerational wealth transfer.
Under the new regime, the primary responsibility for reporting and paying IHT on pension assets shifts to the personal representative (PR)—the executor or administrator of the estate.
Reporting obligations: PRs must now identify every pension pot held by the deceased and report their values to HMRC using the IHT400 (the full inheritance tax account) and the new supplementary IHT400 forms specifically designed for pension assets.
Information sharing: To facilitate this, the Finance Bill 2025-26 mandates that pension scheme administrators (PSAs) must provide valuation details and beneficiary information to the PR within four weeks of being notified of the death.
The "notional" estate: The pension is treated as a separate "notional" part of the estate. The PR is responsible for calculating the tax due on the pension assets based on a pro-rata allocation of the deceased’s available nil-rate bands.
To ensure HMRC collects the tax before beneficiaries can deplete the pension funds, a new "withholding and payment" mechanism has been established. This prevents "leakage" where a beneficiary might receive and spend the pension before the IHT bill is settled.
Withholding notices: If the PR identifies a likely IHT liability, they can issue a notice to the pension provider to withhold 50% of the taxable benefits. This freeze can remain in place for up to 15 months while the final tax liability is calculated.
The 'scheme pays' mechanism: Rather than the PR paying the tax from the estate's liquid cash, the beneficiary or PR can instruct the pension scheme to pay the IHT directly to HMRC from the pension pot.
Income tax adjustment: For those who die after age 75, the pension is also subject to income tax. To avoid "double taxation," the IHT is deducted first; income tax is then only charged on the net amount remaining.
The following table outlines which assets will be dragged into the IHT net and which remain protected under the new rules.
In scope (taxable) | Out of scope (exempt) |
Unused DC pension pots: including modern workplace pensions and individual SIPPs. | Spouse/civil partner exemption: assets passing to a surviving spouse remain 100% exempt from IHT. |
Flexi-access drawdown: funds already in a drawdown account but not yet withdrawn. | Life assurance in trust: policies written in a valid trust (e.g., relevant life or group life) remain outside the estate. |
Pension protection lump sums: capital sums paid from a defined benefit (DB) scheme. | Death-in-service benefits: lump sums paid if the member dies while in active employment. |
Discretionary death benefits: funds where the trustee has the final say on the recipient. | Dependants' scheme pensions: ongoing income paid to a widow, widower, or child from a DB scheme. |
Annuity guarantees: capital sums from "value protection" or "guaranteed periods." | Charitable legacies: funds left to a registered charity remain exempt. |
The impact on investors and the AIM market
Perhaps the most disruptive change for passive investors is the treatment of shares listed on the Alternative Investment Market (AIM). Previously, a portfolio of qualifying AIM shares held for at least two years could receive 100 per cent relief.
Under the new rules, AIM shares are being "downgraded." They will no longer qualify for the 100 per cent allowance at all. Instead, they will be subject to a flat 50 per cent relief regardless of the value held. For an investor with a £1 million AIM portfolio, this creates an automatic, effective 20 per cent tax liability (£200,000) that did not exist previously.
Furthermore, the 2027/28 tax year will bring another major change: bringing unused pension funds into the inheritance tax net. Currently, pensions are one of the most effective ways to pass on wealth tax-free. From April 2027, they will be included in the value of the estate, making comprehensive planning even more urgent.
As the "tax-free" ceiling lowers, investors must look toward more proactive strategies to mitigate their future liabilities.
The most straightforward way to reduce a taxable estate remains the "potentially exempt transfer" (PET). By gifting assets during your lifetime and surviving for seven years, the value falls outside your estate. However, for business owners, gifting shares now may trigger capital gains tax (CGT) issues, so professional advice is essential to balance the "death tax" against "life taxes."
Trusts remain a powerful tool for maintaining control over assets while removing them from a personal estate. While trusts will also be subject to the new £2.5 million cap for relief, they can still be used to "freeze" the value of an estate at today's prices, ensuring that any future growth in the business or portfolio occurs outside of the donor's taxable estate.
For those with illiquid assets—like a family company—taking out a life insurance policy specifically to cover the projected 20 per cent tax bill is becoming a standard strategy. When the policy is "written in trust," the payout does not form part of the estate and provides the heirs with the cash needed to pay HMRC without being forced to sell the business.
In this more restrictive environment, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) remain two of the most potent tools in an investor's kit.
Both schemes traditionally qualify for Business Property Relief after a two-year holding period. Because most EIS and SEIS investments are in unquoted trading companies (rather than AIM-listed ones), they should still qualify for the 100 per cent relief cap of £2.5 million.
For an investor within the 40% inheritance tax bracket, a £10,000 investment into EIS-eligible shares provides dual-benefit mitigation: £3,000 in upfront income tax relief (30%) and a further £3,680 in estimated inheritance tax relief, as the shares typically qualify for Business Relief (BR) after a two-year holding period.
For an investor who previously relied on AIM for their IHT planning, the new flat 50 per cent relief on AIM may make unquoted EIS funds look significantly more attractive. Not only do they offer the potential for 100 per cent IHT relief (up to the cap), but they also provide:
Income tax relief: 30 per cent for EIS and 50 per cent for SEIS.
Capital gains deferral/exemption: Allowing investors to manage their CGT liabilities while simultaneously planning for their estate.
Loss relief: The Enterprise Investment Scheme significantly limits downside risk; for a 45% taxpayer, the total investment exposure on a £10,000 investment into a company that fails can be reduced to just £3,850. This is achieved by combining the initial 30% income tax relief (£3,000) with subsequent loss relief (£3,150) on the remaining capital at risk.
As we move toward the 2026/27 tax year, the "set and forget" approach to inheritance tax is over. Whether through reallocating portfolios toward unquoted EIS shares or accelerating lifetime gifts, investors must act now to ensure their wealth is preserved for the next generation rather than the taxman.
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