STEP Urges Government To Reconsider Flawed Inheritance Tax Reform

Ahead of the Budget, STEP, the professional body for trust and estate practitioners, is reiterating the need for the government to reconsider some of its proposals in the Finance Bill 2025-2026.

STEP warns that the proposed reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) will negatively impact smaller family businesses, farms, older business owners and their families. Younger owners will be able to take out insurance to cover the inheritance tax (IHT) bills or do lifetime planning. This is not an option for elderly farmers and others who are at serious risk of being hit by unexpected tax bills.

Plans to tax unused defined contribution pension funds risk bringing delay and unfairness in the administration of even quite simple estates, at a time when people are dealing with bereavement.

The Budget on 26 November presents an opportunity for the government to show that it has heard the concerns from industry on technical complexities, and understands the need to take action.

Unfair Agricultural And Business Property Relief Changes Disproportionately Punish Older Business Owners

Under current plans to be introduced from April 2026, farms and family businesses will receive full IHT relief only on the first £1 million of assets. Anything above this faces a 20% tax charge, when previously no inheritance tax was due. Unlike the other IHT allowances available on death, this £1 million relief cannot be transferred between spouses.

Emma Chamberlain TEP, spokesperson for STEP and Barrister, said: "If you are going to give the £1 million allowance at all, then make it transferable. The nil rate band and the residential nil rate band were made transferable precisely to avoid the need for complex trust arrangements in wills. The lack of transferability here simply increases unnecessary complexity that is completely at odds with existing inheritance tax rules." 

"The well advised and wealthy will be better able to amend their wills and avoid or mitigate the charge. Those whose spouse has already died or are unaware of the problem will find that in fact it is not £1 million per spouse but £1 million allowance per family – very different from the £3 million that the government says can be passed on tax free. Passing on £3 million tax free would only be possible with some quite complex planning. It would be better to be upfront with people about the true position. Younger people will be able to give away £1 million tax free every seven years. This option will not be open to older tax payers."

STEP has put forward its concerns calling on the government to allow spouses and civil partners to transfer their allowance like other main IHT reliefs.

Elderly farmers and business owners have previously been incentivised by government policy to do no lifetime planning and pass on property and assets on death. For many, this meant not paying capital gains tax (CGT) or IHT. The change in government policy has been very unexpected. For those that are unwell, elderly and unlikely to survive seven years from any gift, they cannot make use of the existing lifetime reliefs.

STEP recommends that the government introduces a transitional arrangement to help those over a certain age who make gifts before April 2026. The current rules would apply and there would be no clawback of relief even if they died within seven years. This will help reduce the risk of older people being hit by tax bills that younger people will be able to plan for. Such a transitional relief will be similar to the one given to non-doms in October 2024. In this case it would be limited only to gifts made before April 2026 for elderly business owners. 

Pension Reforms Will Create Chaos And Put Bereaved Families And Ordinary People Who Act As Executors At Financial Risk 

Under pension reforms proposed by the government in July to come into force in April 2027, personal representatives (PRs), those legally responsible for gathering in the assets of estates and distributing to beneficiaries, would be held liable for inheritance tax on pension funds they do not control. This is an unwanted and unexpected change to the proposals in the original consultation in 2024 which, if it goes ahead, has the capacity to result in great unfairness.

STEP warns that if the Finance Bill isn’t amended, families will be left struggling to find anyone willing to act as executor. If a professional does act as executor they will not want to distribute the estate for years in case new pension assets come to light on which they are personally liable to pay IHT. The change will drive up professional indemnity insurance costs for advisors and therefore clients.

Estates could be left undistributed for years as executors wait for valuations, pension fund details and HMRC decisions. This will leave spouses, partners and children without access to funds from the estate (e.g., the deceased’s bank accounts). People will already be subject to 8% interest from HMRC on any unpaid inheritance tax six months from death.

Emma Chamberlain commented: "STEP, alongside other industry bodies, has serious concerns about how the proposals to charge inheritance tax on pensions are designed. There is no reason why the executors should have to pay IHT due on the pension fund from assets of the estate, such as the house or bank accounts, which may well pass to completely different people. If they have distributed the estate before the pension fund IHT liabilities have been settled, they are personally liable." 

STEP has proposed recommendations and safeguards to help reduce risks if the government’s proposed changes come into effect. These include giving executors proper protection so that if a new pension fund emerges long after the estate has been distributed they are not personally liable. Unless it is clear the pension fund passes to an exempt beneficiary such as a spouse or charity, the pension scheme administrators should also be required to keep 50% of the pension fund until directed otherwise by executors so that it can be used, if required, to pay IHT.

As part of the Finance Bill consultation process, STEP, who represents over 8,000 trust and estate practitioners in the UK, has submitted a number of consultation responses and also presented evidence as part of the House of Lords Finance Bill Sub-Committee inquiry on the Draft Finance Bill 2025-26.

The Finance Bill Sub-Committee is expected to present its report and findings in early 2026.