UK Inheritance Tax 2026/27 — £325k NRB, BPR Cap, Pension Estate Trap

Reviewed by Alex Morgan · Updated April 2026 · BPR cap live · Pension reform Apr 2027

The 2026/27 IHT framework

Worked example — £900k estate, single person

The 7-year rule and taper relief

Most lifetime gifts are Potentially Exempt Transfers (PETs). They are tax-free at the time of the gift and become permanently exempt once the giver has survived 7 years. Die within 7 years and the gift becomes chargeable, eating into your nil rate band before the rest of your estate.

Common misconception: taper relief reduces the tax, not the value of the gift. The gift still uses up the giver's nil rate band first. Taper relief only kicks in if the gift exceeds the nil rate band — meaning many small gifts get no taper benefit at all.

The April 2026 BPR/APR cap — £1m at 100% relief

Business Property Relief (BPR) and Agricultural Property Relief (APR) have historically given 100% relief on qualifying business assets and farmland — meaning a family-owned trading business worth £10m could pass to children with zero IHT. From 6 April 2026 this changed:

• First £1m of combined BPR/APR-qualifying assets per individual: still 100% relief (no IHT).
• Above £1m: only 50% relief — meaning the standard 40% rate applies to half, giving an effective 20% IHT rate.
• The £1m cap is per person, not per estate — couples can use £2m combined.
• The £1m cap is not transferable between spouses in the same way as the NRB. Use it or lose it.
• BPR on AIM-listed trading shares is reduced from 100% to 50% (effective 20% IHT rate from April 2026, regardless of size).

This is the most significant inheritance reform for family business owners since BPR was introduced in 1976. Government estimates suggest 2,000-3,000 estates per year will be affected by the cap, raising around £500m annually for the Treasury. Family farms have been particularly vocal — many farms valued at £2-5m face IHT bills of £200-£800k for the first time, often without the liquid assets to pay them.

The April 2027 pension reform — most DC pots into the estate

From 6 April 2027, most unused defined-contribution pension pots will be included in the estate for IHT purposes. This is the biggest reversal of inheritance planning orthodoxy in a generation. For decades, financial advisers have steered retirees toward drawing from ISAs and general accounts first, preserving pensions for last because they sat outside the IHT estate. From April 2027 that strategy backfires — leaving large pension pots untouched at death will trigger the standard 40% IHT.

Excluded from the change: death-in-service lump sums payable from registered pension schemes, dependants' scheme pensions paid as income, and certain charity bequests. Most flexi-access drawdown pots and uncrystallised SIPP funds are caught by the new rules. Many advisers expect a surge in pension drawdown during 2026 as savers crystallise tax-free lump sums and gift them within the 7-year rule before the new regime hits.

Legal IHT mitigation strategies

• Use the spouse exemption — assets between UK-domiciled spouses/civil partners pass IHT-free with no limit.
• Maximise the annual gift allowances — £3,000 (with 1 unused year carry), £250/recipient, wedding gifts, gifts out of normal income.
• Make PETs early — survive 7 years and the gift is fully exempt.
• Charitable giving — leave 10%+ of net estate to charity to reduce IHT rate from 40% to 36%.
• Whole-of-life insurance in trust — pays out outside the estate to cover the IHT bill.
• Gift the home (with caveats) — but Pre-Owned Asset Tax (POAT) and Gift With Reservation of Benefit (GROB) rules block most attempted home gifts.
• BPR-qualifying investments — AIM shares held 2+ years still get 50% relief (= 20% effective IHT) from April 2026.
• Discretionary trusts — useful for staged transfers but subject to entry charge, periodic charge and exit charge.

When IHT is paid (and how)

IHT is paid by the executor from the estate (or by the recipient of a chargeable gift). Key deadlines:

• IHT due by the end of the 6th month after death — interest accrues from this date.
• HMRC IHT400 return required for most estates (IHT205 for excepted estates of low value).
• Tax on land/property can be paid in 10 annual instalments — saves cashflow but interest applies.
• Probate cannot be granted until IHT is paid (or arrangements agreed) — practical chicken-and-egg problem since the estate's assets are usually frozen until probate.

Pair this with

• → UK Pension Annual Allowance 2026/27 — relevant for the April 2027 estate reform
• → UK Capital Gains Tax 2026/27 — CGT-on-death rules ("uplift to market value")
• → UK Self Assessment 2026/27 — final SA return for the deceased
• → UK Marriage Allowance 2026 — companion to spousal exemption planning
• → UK Statutory Rates 2026/27 (open dataset)

Sources

1. gov.uk — Inheritance Tax
2. gov.uk — IHT gifts and the 7-year rule
3. gov.uk — Business Property Relief
4. HMRC — BPR/APR cap from April 2026
5. HMRC — Pensions and IHT from April 2027
6. Inheritance Tax Act 1984