Labour Inheritance Tax Policy: Navigating Frozen Bands, Asset Caps, and New Pension Rules
Four reforms now define how inheritance tax works in the UK, all legislated through the Finance Act 2026 and all originating from the Autumn Budget 2024. Labour inheritance tax policy freezes the nil-rate band at £325,000 until April 2031, caps Agricultural and Business Property Relief at £2.5 million per person from April 2026.
Brings unused pension funds into taxable estates from April 2027, and closes offshore trusts to non-domiciled individuals from April 2025. The standard IHT rate of 40% applies to all taxable estates above the threshold.
Key Takeaways
- The nil-rate band has been frozen at £325,000 since 2009 and will remain frozen until April 2031. The residence nil-rate band of £175,000 is equally frozen, meaning the maximum individual threshold stays at £500,000.
- Agricultural Property Relief and Business Property Relief now carry a combined 100% relief cap of £2.5 million per person from April 2026; spouses and civil partners can transfer unused allowance, giving couples up to £5 million of qualifying assets free of IHT.
- HMRC estimates approximately 10,500 estates will face IHT for the first time when unused defined-contribution pension funds enter the taxable estate from 6 April 2027.
What Are Labour’s Changes to Inheritance Tax?
Labour’s inheritance tax changes target four distinct routes through which wealth previously escaped IHT. Each reform operates independently and affects a different group of estates.
Chancellor Rachel Reeves announced the reforms at the Autumn Budget 2024, with all four pillars subsequently legislated through the Finance Act 2026. What each announcement means in practice for different estate types is covered in this analysis of Rachel Reeves inheritance tax changes.
The first reform freezes the nil-rate band at £325,000 until April 2031, a continuation of a freeze already running since 2009 that functions as a stealth tax, pulling more ordinary estates into the IHT net each year through inflation alone.
The second caps 100% Agricultural and Business Property Relief at £2.5 million per person from April 2026, with a 20% effective IHT rate applying to qualifying assets above that level. The third brings most unused pension funds into the taxable estate from April 2027.
The fourth closes offshore trust arrangements used by non-domiciled individuals to shelter overseas assets from IHT, effective from April 2025.
The nil-rate band freeze is the reform with the widest reach, it affects every estate approaching the £325,000 threshold, not only farms, businesses, or pension holders.
Inheritance Tax Thresholds Under Labour: What Has Frozen and What Has Not?
The nil-rate band stands at £325,000, unchanged since 2009 and now confirmed frozen at that level until April 2031 by HM Treasury under the Inheritance Tax Act 1984 framework.
The Nil-Rate Band and Residence Nil-Rate Band
The residence nil-rate band of £175,000 applies when a qualifying home passes to direct descendants. Combined with the standard nil-rate band, an individual can pass up to £500,000 free of IHT.
Married couples and civil partners can transfer any unused nil-rate band to the surviving spouse, giving qualifying couples a combined threshold of up to £1,000,000.
Both bands are frozen until April 2031. HMRC reported that 31,500 estates, 4.62% of all deaths in the UK, paid inheritance tax in 2022/23, raising £6.70 billion. Threshold figures confirmed as of June 2026 via HMRC and the House of Commons Library.
How Labour’s Nil-Rate Band Freeze Creates Fiscal Drag
Freezing the threshold while house prices and asset values rise means more estates cross the IHT boundary each year without any change to the headline rate. In 2020/21, 27,000 estates paid IHT, by 2022/23, that figure had risen to 31,500.
Understanding the UK inheritance tax gift exemption rules is one way that estates approaching the threshold can reduce exposure through potentially exempt transfers made during a person’s lifetime.
| Threshold | Amount | Applies To | Frozen Until |
|---|---|---|---|
| Nil-rate band | £325,000 | All estates | April 2031 |
| Residence nil-rate band | £175,000 | Home left to direct descendants | April 2031 |
| Combined (individual) | £500,000 | Qualifying individuals | April 2031 |
| Combined (couple, transferable) | £1,000,000 | Married couples / civil partners | April 2031 |
| IHT rate above threshold | 40% | All taxable estates | NA |
| Reduced rate | 36% | Estates donating 10%+ to charity | NA |
While the freeze affects the broadest range of estates, the APR/BPR cap targets a smaller but financially significant group, farms and family businesses with qualifying assets above £2.5 million.
How the £2.5 Million Cap Works From April 2026?
From April 2026, 100% relief on qualifying agricultural and business property is capped at £2.5 million per person. Any qualifying assets above that level attract 50% relief, an effective IHT rate of 20%.
The cap did not arrive at £2.5 million in a single step. It went through three distinct stages:
- Autumn Budget 2024: A £1 million combined cap on APR and BPR was announced, with 50% relief applying to qualifying assets above that level.
- Budget 2025: The allowance was made transferable between spouses and civil partners, including where the first death occurred before 6 April 2026.
- 23 December 2025: The cap was raised to £2.5 million per person and enacted in the Finance Act 2026, Section 65 and Schedule 12.
The National Farmers’ Union welcomed the December revision as a significant reprieve, though farming organisations argued the original £1 million cap would have affected tens of thousands of family farms. The Office for Budget Responsibility estimates the APR/BPR reform will raise approximately £0.5 billion per year from 2027/28.
Farm and business owners with qualifying assets approaching or above the £2.5 million threshold should seek a current valuation to understand their exposure under the revised rules.
For couples, the transferable allowance means up to £5 million of qualifying assets can pass free of IHT. For more on how this interacts with the second death, see how to avoid inheritance tax when second parent dies.
AIM-listed shares are subject to a separate change, IHT on AIM shares rises from 0% to 20% from April 2026 and does not count towards the £2.5 million allowance.
The pension reform, taking effect a year later in April 2027, carries implications that are less widely understood and potentially more significant for many families.
A significant factual error continues to circulate across financial and legal publications: the APR/BPR cap is widely reported as £1 million per person. That figure reflects the original Autumn Budget 2024 announcement and has not been current since 23 December 2025, when the government raised it to £2.5 million.
The revised threshold was enacted in the Finance Act 2026, Section 65 and Schedule 12, and is confirmed in the House of Commons Library Research Briefing CBP-10181, updated April 2026.
Pensions and Inheritance Tax: What Changes in April 2027?
Most unused defined-contribution pension funds will be brought within the taxable estate for IHT from 6 April 2027, ending a position in which pension wealth sat outside the IHT net entirely.
From April 2027, most unused pension funds will be included within the estate for inheritance tax purposes. Death-in-service benefits payable from a registered pension scheme are explicitly excluded from this change.
Personal representatives, not pension scheme administrators, are responsible for reporting and paying any IHT due on pension funds from April 2027, as confirmed by HMRC’s July 2025 policy paper.
Pension funds were historically outside the IHT net because most UK pension schemes operate as discretionary trusts, meaning the assets technically belong to the scheme rather than the individual.
The 2015 pensions freedoms and the abolition of the lifetime allowance in March 2023 accelerated the use of pensions as an inheritance vehicle rather than purely a retirement fund, a distortion the GOV.UK policy paper explicitly identifies as the driver of this reform.
Anyone holding significant unused pension funds should review their nomination of beneficiary forms and consider taking regulated financial advice ahead of the April 2027 implementation date.
What is less widely reported is the compounding tax effect that follows. From April 2027, an estate containing unused pension funds will first pay IHT at up to 40% on the pension element. The beneficiary then pays income tax at their marginal rate, up to 45% for additional-rate taxpayers, when drawing the inherited funds.
The combined effective rate on inherited pension wealth could reach approximately 67% for additional-rate taxpayers, calculated as a 40% IHT charge on the estate combined with a 45% income tax rate on drawdown.
For a detailed analysis of how this affects pension planning, see UK pension inheritance tax changes.
A fourth reform, one that preceded all the others, has been reshaping the position of non-domiciled individuals since April 2025.
Non-Domiciled Individuals and Offshore Trusts: The April 2025 Changes
From 6 April 2025, the UK moved to a residence-based inheritance tax system, overseas assets held in offshore trusts can no longer be sheltered from IHT by non-domiciled individuals who meet the long-term residency threshold.
Previously, excluded property trusts allowed non-domiciled individuals to hold overseas assets outside the IHT net indefinitely, regardless of how long they had lived in the UK. Under the new residence-based regime, any individual who has been UK-resident for 10 or more years within the preceding 20-year period becomes subject to IHT on worldwide assets.
HM Treasury described the reform as closing a loophole exploited by the wealthiest offshore trust users, consistent with the Labour manifesto commitment to end the use of offshore trusts to reduce inheritance tax exposure.
Discretionary trusts holding qualifying assets are also subject to revised treatment under the Finance Act 2026, with trust-level IHT charges recalculated under the new residence-based framework.
From 6 April 2025, non-domiciled individuals who have been UK-resident for 10 or more years within the preceding 20-year period became subject to inheritance tax on worldwide assets. Excluded property trusts, previously used to shelter overseas wealth indefinitely, no longer achieve that outcome under the residence-based system introduced by the Finance Act 2026.
Taken together, Labour’s four reforms represent the most significant restructuring of inheritance tax since the Inheritance Tax Act 1984.
How Much Will Estates Pay? A Summary of Labour’s Four IHT Reforms
HMRC data and Office for Budget Responsibility projections confirm that fewer than 10% of estates will face any IHT liability under the reformed system, but those that do face materially higher exposure than under the pre-2024 framework.
| Reform | In Force From | Estates Primarily Affected | Key Figure | Legislation |
|---|---|---|---|---|
| Nil-rate band freeze | Ongoing to April 2031 | All estates near £325,000 | £6.70bn raised in 2022/23 | IHTA 1984 |
| APR/BPR cap | April 2026 | Farms and businesses above £2.5m | ~185 estates/year (OBR) | Finance Act 2026, S.65 |
| Pension IHT | April 2027 | Estates with unused DC pension funds | ~10,500 newly affected (HMRC) | Finance Act 2026 |
| Non-dom/offshore trust | April 2025 | Non-doms resident 10+ of 20 years | Worldwide assets in scope | Finance Act 2026 |
HMRC’s own figures show that fewer than 5% of deaths in any given year result in an IHT liability, the reforms raise the stakes for that minority without widening the net significantly.
AIM-listed shares face a separate Labour inheritance tax change that receives little coverage. From April 2026, shares listed on the Alternative Investment Market attract IHT at 20%, up from 0% previously.
This change operates independently of the £2.5 million APR/BPR allowance and does not count towards it. It is a change that has attracted far less public attention than the APR/BPR reforms, despite affecting a different but equally distinct class of investor.
Conclusion
Labour has used a single parliamentary cycle to close four of the most significant routes through which wealth escaped inheritance tax, each reform targeting a distinct group of estates that previously faced little or no IHT exposure.
The Finance Act 2026 makes all four reforms permanent. Labour inheritance tax policy means a structurally different set of rules for farms, family businesses, pension holders, and long-term non-domiciled residents, changes that are now law and will shape estate planning decisions across the UK for years to come.
FAQ
Will Labour scrap inheritance tax?
No. Labour is tightening inheritance tax and raising more revenue from it. All four reforms announced at the Autumn Budget 2024 are now law under the Finance Act 2026.
What are the inheritance tax changes in April 2026?
Two changes take effect in April 2026: the APR/BPR 100% relief cap at £2.5 million per person, and IHT on AIM-listed shares rising from 0% to 20%.
What happens to pensions and inheritance tax from 2027?
Yes, most unused defined-contribution pension funds enter the taxable estate from 6 April 2027. Death-in-service benefits from registered pension schemes are explicitly excluded from this change.
How does Agricultural Property Relief change under Labour?
From April 2026, 100% APR is capped at £2.5 million per person. Qualifying assets above that level receive 50% relief, an effective IHT rate of 20% on the excess.
What is the nil-rate band under Labour?
£325,000, frozen at this level since 2009 and confirmed frozen until April 2031. Combined with the residence nil-rate band, qualifying individuals can pass up to £500,000 free of IHT.
How will Labour’s changes affect family businesses?
Less severely than originally feared. The cap sits at £2.5 million per person, and up to £5 million for couples, meaning the majority of family business estates will not face additional IHT under the revised rules.
Does the seven-year rule still apply under Labour?
Yes. Potentially exempt transfers made more than seven years before death remain fully outside the taxable estate. Labour has made no changes to this rule.
Disclaimer: The information in this article is for educational purposes only and does not constitute formal legal or financial advice; readers should consult a qualified professional regarding their specific estate planning needs.
