What the inheritance tax rise in the Budget means for you

Only around 4 per cent of families have to pay ‘death tax’ under current legislation

Chancellor Rachel Reeves has confirmed changes to inheritance tax (IHT) at the Budget as part of her tax rise package which aimed to raise £40bn.

IHT has been reformed with the chancellor saying she aimed to take “a balanced approach.” The tax is a levy on the estate of someone who has died – meaning their property, money and possessions.

Here’s everything you need to know about the changes and what they could mean for your family:

What is inheritance tax?

Inheritance tax is a levy applied to the estate of someone who has died, but only around 4 per cent of families end up paying it, as most estates fall below the tax threshold.

Key to this exemption is that anything left to a spouse or civil partner is not subject to inheritance tax, regardless of the estate’s value. So if a deceased individual leaves their entire estate to their partner, even if valued at £10m, no inheritance tax will be charged.

However, this exemption does not extend to partners who live together but are not married or in a civil partnership.

Each individual has a £325,000 inheritance tax-free allowance. Estates valued below this threshold incur no tax, while those above it are taxed at 40 per cent on the excess.

What changes are coming?

Inheritance tax thresholds will be extended for two more years, until 2030. This means the first £325,000 of any estate can still be inherited tax-free until then. After this, it will still be taxed at 40 per cent. Ms Reeves did not reveal what changes could be expected after this.

The chancellor also announced that inherited pensions will be brought into inheritance tax from April 2027.

A few lesser-known rules have also been tweaked: business relief and the ability to pass on agricultural land tax-free.

Ms Reeves said: “We will close the loophole made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027.

“We will reform agricultural property relief and business relied from April 2026, the first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all.

“But for asset over £1m, IHT will apply with a 50 per cent relief and at an effective rate of 20 per cent. This will ensure we continue to protect small family farms with three quarters of claims unaffected by these changes.”