Inheritance tax and what it means for children in the UK is no longer a rich person’s problem. The nil rate band has been frozen at £325,000 since 2009 and will remain there until at least April 2030, meaning more families are being pulled into the inheritance tax net each year as property prices continue to climb. If you have spent decades working hard and building something worth passing on, HMRC is quietly positioning itself to take a large slice of it.
The good news is that there is a lot you can do about it. Here is the full picture, including the changes already in place and the big one coming in 2027 that most people have not heard about yet.
What Are the Inheritance Tax Thresholds Right Now?
The standard nil rate band sits at £325,000, with everything above that taxed at 40%. On top of that, the residence nil rate band adds up to £175,000 of additional tax free capacity when you leave your main home to direct descendants, bringing the potential individual threshold to £500,000. Direct descendants include children, stepchildren, adopted children, and grandchildren.
Married couples and civil partners can combine their allowances, meaning a couple can potentially pass on up to £1 million completely free of inheritance tax when both nil rate bands are transferred between them. This transfer happens automatically when assets pass between spouses, so the full combined allowance is available on the second death.
If you are not married or in a civil partnership, none of that transferability applies. For unmarried couples with children, this is one of the strongest practical arguments for either getting married or doing some serious planning around your estate.
How Many People Are Actually Paying It?
More than you might think, and the number is growing. The UK collected £8.25 billion in inheritance tax receipts in the 2024 to 2025 tax year, with projections suggesting revenues could exceed £9 billion by 2026 to 2027. The frozen thresholds are doing exactly what the government intended quietly expanding the tax base without anyone having to vote for a rate increase.
The Seven Year Rule: Your Most Powerful Tool
One of the most effective ways to reduce the inheritance tax your children face is to give money away while you are still alive. Gifts made more than seven years before your death fall completely outside your estate for purposes. For gifts made within seven years, taper relief can reduce the tax charge the closer you get to that seven year mark.
You do not have to wait seven years to start making tax free gifts either. Every individual can give away £3,000 per tax year with no inheritance tax implications at all. If you did not use last year’s allowance, you can carry it forward and give away £6,000 in a single year. Small gifts of up to £250 per person per year to any number of individuals are also exempt, as are wedding gifts up to certain limits.
There is also a particularly useful exemption for surplus income. If you have regular income that you genuinely do not need for your day to day living, you can gift it completely free of inheritance tax with no upper limit, as long as the gifts form a consistent pattern and do not eat into your standard of living.
What Changed From April 2026?
Two significant changes came into effect from 6 April 2026 that affect certain estates.
First, the rules around Business Property Relief and Agricultural Property Relief were overhauled. Under the new rules, the first £1 million of combined business and agricultural property qualifies for 100% relief, meaning no inheritance tax is charged on that portion. Any qualifying property above £1 million receives 50% relief, resulting in an effective tax rate of 20% on the excess. For family businesses and farms, this is a material change to how much can be passed on tax free.
Second, the AIM share relief that many investors had been using as a planning tool has been cut back. Previously, qualifying AIM shares held for two years could be passed on completely free of inheritance tax. From April 2026, that relief has been reduced to 50% for all investors, making the strategy considerably less attractive than it once was.
The Big One Coming in 2027: Your Pension Is No Longer Safe
This is the change that will catch the most people off guard, and it is the one that arguably matters most for inheritance tax planning for children in the UK right now.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person’s estate for inheritance tax purposes. Right now, pension pots sit entirely outside your estate. Many people have deliberately left their pensions untouched in retirement, drawing on ISAs and other savings first, because unused pensions pass to their beneficiaries free of inheritance tax. That strategy is about to become redundant.
For those who die over the age of 75, beneficiaries will also need to pay income tax at their own marginal rate on any pension drawdowns. This creates a potential combined effective tax rate of between 64% and 67% on inherited pension wealth in the worst cases.
The government estimates that around 10,500 estates per year will become liable for inheritance tax as a direct result of this pension change, representing roughly 1.5% of total UK deaths. If you have built a substantial pension pot and were planning to pass it to your children, reviewing that strategy with a qualified financial adviser before April 2027 is not optional it is urgent.
One immediate practical step worth taking now: it may be more tax efficient to nominate your spouse as the primary beneficiary of your pension rather than your children, since assets passing between spouses remain exempt from inheritance tax even under the new rules.
Other Steps Worth Taking Now
Write a will. The majority of UK adults still do not have one. Dying without a will means the intestacy rules decide who gets what, and they do not always align with your wishes. A will also lets you make full use of the residence nil rate band by explicitly leaving your home to your direct descendants.
Consider a trust. Trusts can be a useful way of passing assets to children while maintaining some control over when and how they access them. The rules around trusts and inheritance tax are complex, so specialist advice is essential before setting one up.
Leave 10% to charity. If you leave at least 10% of the taxable portion of your estate to a qualifying charity in your will, the inheritance tax rate on the remainder drops from 40% to 36%. For larger estates, the saving can easily exceed the value of the charitable gift itself, making this a genuinely worthwhile consideration rather than just a feel good gesture.
Review your pension nominations. Given the 2027 changes, now is the time to revisit who you have nominated as your pension beneficiary and make sure it fits your wider estate plan.
Don’t leave it too late
Inheritance tax and what it means for children in the UK is a topic that far more families need to take seriously in 2026. Frozen thresholds, rising property values, and the incoming pension changes mean the net is widening every single year.
The tools to fight back are all there: lifetime gifting, annual exemptions, pension nomination reviews, a properly drafted will, and where appropriate a trust structure. None of this requires expensive schemes or complex arrangements. It just requires getting started before the clock runs out.
The best inheritance tax plan is the one you put in place while there is still time to make it count.
Content on IceburgWealth.com is for informational purposes only and not intended as investment advice. While we strive to provide accurate and up-to-date information, Iceburg Wealth is not responsible for any errors or omissions, or for outcomes resulting from the use of this information. Readers should seek professional advice before making any financial decisions.