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How Life Insurance can help with inheritance tax changes

The current government have recently announced a tranche of changes to inheritance tax which will start from April 2025, most notably the reduction in Agricultural Property Relief which has been heavily criticised by the farming community who have faced spiralling input costs alongside other issues such as climate change.

These shifts are causing considerable concern among families, landowners, and business owners who rely on long-standing reliefs to pass assets to the next generation. As the rules evolve, many are beginning to assess how these reforms may impact their long-term financial planning, estate strategies and the future stability of their assets.

The proposed changes, staggered over three-years, will lead to reductions in Business and Agricultural Property Relief, the incorporation of unused pension assets into deceased estates and the closure of the non-domiciled tax regime. As a result, many individuals who have never previously faced an inheritance tax liability may now find themselves caught by increasingly complex thresholds. With rising property values, expanding estates, and now a broader definition of what may be taxed, it is becoming a far more pressing issue for families across the UK. These staged reforms require forward-thinking and careful preparation to help reduce exposure and ensure that family wealth is preserved as intended.

Changes to Inheritance Tax from April 2025

Domicile Status and Inheritance tax

The non-domiciled tax regime will be changing in April 2025 and a person’s estate, including worldwide assets, will now be subject to inheritance tax if they have been resident in the UK for at least 10 years out of a 20-year period.

This adjustment represents a significant tightening of the rules, meaning that individuals with international ties or foreign assets will need to re-examine how their estates are structured. For those who previously benefited from favourable domicile status, the new inheritance tax framework means that proactive planning becomes even more important. Without preparation, large estates—including overseas property, business interests, and family wealth, may be unexpectedly exposed to these upcoming liabilities.

Agricultural and Business Property Relief

Agricultural Property and Business Property inheritance tax exemptions designed to help families pass their business, shares and land onto the next generation, without being broken up, will change in April 2026, with reduced benefits for higher-value estates.

These reliefs have long been essential to ensuring the continuity of farms and rural enterprises, allowing land and operations to transition smoothly through generations. As these reliefs diminish, families may face greater difficulty keeping holdings intact, potentially requiring the sale of assets to cover inheritance tax obligations. This is particularly concerning for agricultural families already coping with financial pressures and rising costs. Understanding how these reductions alter the future tax burden is crucial, and many families are now seeking professional guidance to navigate the shifting inheritance tax landscape.

Pensions

From April 2027 unused pensions, previously exempt from IHT, will now be considered as part of an estate and also subject to inheritance tax. Previously unused pension could be passed on to beneficiaries with 100% tax relief so many families will now need to review their pension arrangement plans.

Previously unused pension could be passed on to beneficiaries with 100% tax relief so many families will now need to review their pension arrangement plans. This change marks a major shift in how pensions contribute to estate planning and may significantly increase inheritance tax liabilities for some households. For those who have accumulated substantial pension savings as a tax-efficient inheritance tool, these new rules may require alternative approaches to protect beneficiaries from unexpected costs.

Life Policies and Inheritance Tax

Families are now considering how to plan for these changes and life policies can be a welcome solution to the inheritance tax burden. Ali Adham, Castleacres’s Life insurance advisor says:

“Whether you want to gift your assets in your own lifetime or pass your property, farm or business as a legacy to your family after death, different life insurance policies can really help with inheritance tax.

There are essentially three basic policies on the market, Whole of Life, Term Life and Short-term Gift Inter-Vivos policies. You can choose which policy suits you family requirements but these policies are all designed to provide a lump sum to your beneficiaries on your death, crucially, if it is held in trust, your family can access it immediately.

Traditionally a family may have used a life insurance settlement to pay off a mortgage or provide an income but if you plan carefully it can also be used to settle an inheritance tax bill enabling your family to hold your property intact ”

These policies are becoming increasingly valuable as inheritance tax rules tighten. By providing a dedicated fund to cover those liabilities, families can avoid selling cherished assets or compromising long-term plans. As the government introduces more changes, life insurance remains one of the most flexible and secure tools available to help manage inheritance tax effectively and preserve wealth for future generations.