Inheritance Tax Has Changed, So Must Your Planning

Published byIan Macdonald

8th July 2025

The recent report on inheritance tax from Wright, Johnston & Mackenzie and Irwin Mitchell highlighted that many more estates will have to pay inheritance tax (IHT) in the coming years – with total tax liabilities more than doubling across Scotland.

It’s also worth noting Glasgow and Edinburgh will be particularly affected because of high property prices.

The increases arise from three changes to IHT which the Chancellor announced in her October 2024 Budget.

Firstly, agricultural and business assets, including family businesses, will lose their IHT-free status from April 2026, with IHT now charged at 20 per cent – half the standard rate.

Secondly, unused pension funds will then become liable to IHT at the full 40 per cent rate from April 2027, which will make many substantial funds taxable which were previously tax-free.

Meanwhile the third ‘change’ isn’t really a change at all – freezing the tax-free nil rate band (NRB) at £325,000 has been extended to April 2030. The allowance hasn’t increased since April 2009, but in that period average house prices in Scotland have increased by nearly 40 per cent (and a UK average of almost double that), bringing many more estates into IHT.

You may be wondering if you and your family will have to pay, and what you can do about it. A single person with no children has only the standard NRB of £325,000, and any assets above that will be taxed at 40 per cent. A married couple has separate NRBs, so can leave a total of £650,000 tax free (increasing to £1m if they have a house worth at least £350,000) and leave it to their descendants.

These allowances are enough to cover most estates, and only a small percentage actually pay IHT, but the bills can quickly become substantial. There are essentially three ways that you can reduce your IHT bill, and most estate planning strategies are a combination of these, and tend to be implemented over an extended period, rather than being a one-off exercise that lets you sit back and think “that’s inheritance tax sorted”.

The first and most common strategy, if you can afford it, is to give assets away and hope to live for seven years so the value drops out of your estate. It is important that the gift is a complete one and that you don’t retain any interest in what you have given away. For that reason, you should always regard planning with the family home as a last resort.

The other two options are more technical, but equally effective.

Rather than trying to reduce the tax bill, you can take out a life insurance policy which pays out on your death and provides cash to pay some or all of the IHT. The policy must be written in trust so it doesn’t form part of your estate and increase the tax even more, and you have to be able to continue paying the premiums for the rest of your life to keep the policy in force.

Life insurance isn’t available to everyone, so the third option is to invest in assets which benefit from the same IHT reliefs as family businesses. These have been restricted by the Budget but are still valuable, and the first £1m remains tax free. The tax benefit is secured after two years, not seven, and you still own the asset if you need it.

There is, of course, an additional option – you could always just spend the money. But even if that is part of your strategy, the rule of thumb is to take professional advice to make sure you are doing the right thing at the right time to meet your needs.

This article first appeared in The Scotsman