After months of speculation, the 2025 Budget delivered by Chancellor Rachel Reeves has confirmed a series of reforms that will shape personal tax and estate planning over the coming years. While the measures announced this year are more modest than those introduced in the 2024 Budget, they remain significant for individuals, business owners and families with complex arrangements. We have summarised the most relevant developments and the planning considerations that may arise.
Business and agricultural property a welcome relief
Arguably the most significant development from an inheritance tax perspective is the treatment of Business Property Relief (BPR) and Agricultural Property Relief (APR). These reliefs have long been central to succession planning for farming families, landowners and business owners.
The Autumn 2024 Budget introduced a £1 million cap on the combined value of business and agricultural property eligible for 100% relief from inheritance tax. Prior to this, APR and BPR were effectively uncapped, allowing qualifying assets to pass free of inheritance tax irrespective of their value.
The 2025 Budget brought a welcome, if modest, refinement to this legislation. The £1 million APR and BPR allowance is now transferable between spouses and civil partners. This means that if one spouse does not use their full allowance, the unused portion can be claimed by the survivor on their death, creating a potential combined allowance of £2 million. This change aligns APR and BPR with other transferable allowances such as the nil rate band and residence nil rate band.
Following the 2024 Budget, those in farming or family businesses faced a use it or lose it approach to the £1 million tax free allowance, often restructuring wills quickly to ensure APR and BPR relief was not lost. This typically involved leaving qualifying assets up to £1 million to beneficiaries other than the surviving spouse such as children or trusts. The 2025 Budget eases this pressure as spousal transferability of the £1 million allowance provides greater flexibility and time to plan effectively. Discretionary trusts will continue to play an important role in preserving control and flexibility across generations.
While this is a helpful refinement to the treatment of APR and BPR, it does not reverse the fundamental changes introduced in the 2024 Budget. Proactive planning remains critical and for estates exceeding the combined allowance, forward planning remains essential to avoid liquidity issues for businesses or unintended tax exposure.
Infected Blood Scheme compensation: inheritance tax exemption
The Government has confirmed that compensation under the Infected Blood Scheme will be fully exempt from inheritance tax (IHT). Where the original claimant has died, the first living recipient will receive an IHT credit, ensuring the value passes tax free on their death. Under the Finance Bill 2025-26, recipients will have two years to gift some or all of their payment while preserving the IHT credit, starting from 4 December 2025. The rules will apply retrospectively, covering payments made before implementation.
This measure removes previous uncertainty and guarantees that these awards, intended to address decades of harm, retain their full value throughout estate planning.
Income tax rises and fiscal drag
Income tax and National Insurance thresholds will remain frozen until 2031. While rates are unchanged, this extended freeze will push more individuals into higher tax bands as earnings rise, often referred to as fiscal drag.
An increase in income tax on dividends from April 2026 was also announced. The basic rate rises to 10.75% and the higher rate to 35.75%, while the additional rate of 39.35% remains unchanged. A 2% rise in income tax on savings income will also take effect from April 2027 and will apply to all income tax bands, meaning the new savings rates will be 22%, 42% and 47% for basic, higher and additional rate taxpayers. These tax rises affect all UK taxpayers.
An increase of 2% on property income was also announced by the Chancellor for all income tax bands, which is to take effect from April 2027. This would take tax on rental income to 22%, 42% and 47% for basic, higher and additional rate taxpayers. Taxation on property income is devolved to the Scottish Government and it is understood that the UK Government will be consulting with the Scottish Government on implementing the new rates. Scottish taxpayers may therefore need to wait until the Scottish Budget on 13 January 2026 to learn whether a similar levy will apply to their rental income.
Pension contributions: National Insurance on salary sacrifice
Salary sacrifice allows employees to exchange part of their salary for employer pension contributions, currently exempt from income tax and National Insurance (NI). From April 2029, NI relief will be capped at £2,000 per year, meaning contributions above this threshold will attract NI charges. This change reduces the efficiency of higher pension contributions and may impact remuneration planning for higher earners. Clients who currently maximise pension funding should review their strategies, explore alternative tax efficient savings options and consider adjusting benefits to mitigate the effect on their net position.
ISA allowance changes
Currently, you can contribute up to £20,000 each tax year across one or more ISAs, splitting this allowance between cash ISAs and stocks and shares ISAs. From April 2027, the annual cash ISA limit for those under 65 will reduce to £12,000 while the overall ISA allowance remains £20,000. This means younger savers will need to invest the remaining £8,000 through a stocks and shares ISA to use the full allowance. Individuals aged 65 and over will retain the £20,000 cash ISA limit. The change aims to encourage more investment, although it may take time to see whether this reform shifts saving habits towards higher risk and potentially higher return assets.
Conclusion
The 2025 Budget produced relatively few surprises. However, as always, there are important developments which carry meaningful implications for estate and tax planning. The ability to transfer the £1 million APR and BPR allowance between spouses will be welcomed by many, while other measures such as frozen tax bands, ISA adjustments and changes to pension contributions require careful consideration.
With the Government committing to a single annual Budget, planning can now be approached with greater certainty. These developments provide a timely reminder to review wills, ownership structures and succession plans to ensure they remain effective within an evolving tax landscape.
If you would like guidance on these changes or assistance with implementing any updates, please contact a member of our team.
This article was co-authored by Hayley McAdam, Trainee Solicitor, in our Private Client team.
