Inheritance Tax Shake-Up: How the Budget Could Reshape the UK Property Market

In a move that's sent ripples through the UK's property landscape, Chancellor Rachel Reeves has unveiled a series of inheritance tax (IHT) changes in Labour's first Budget in 14 years. These reforms, set to take effect over the next few years, could significantly alter the dynamics of property ownership and investment strategies across the nation.

At the heart of the changes is the extension of the inheritance tax threshold freeze. The nil-rate band of £325,000 and the residence nil-rate band of £175,000 will remain static until 2029-30, two years longer than previously announced1. This freeze, against a backdrop of rising property values, means more estates will inevitably fall into the IHT net – a phenomenon known as "fiscal drag".

For the property market, this could spell a reluctance among older homeowners to sell larger properties, potentially leading to a shortage of family homes for the next generation. The knock-on effect? Continued upward pressure on prices of detached homes, a trend already evident in cities like Edinburgh and Glasgow, where average detached house prices have risen by over £1,000 a week in the past year.

But it's not just the threshold freeze causing concern. From April 2026, reforms to agricultural and business property relief will see a 50% reduction in relief for qualifying assets above a £1 million threshold. This could have far-reaching implications for the rural property market and potentially lead to more agricultural land and business properties being sold.

Perhaps the most significant change, however, comes in 2027 when unused pension funds will be brought within the scope of IHT2. This marks a stark departure from the current position and could mean many more estates that currently escape IHT will be caught in its web. As Gary Smith from Evelyn Partners notes, "More families will be drawn into the web of inheritance tax from 2027, and some of those will need to start planning now if they want to mitigate the effects".

The repercussions of these changes are likely to be felt across the property market. We may see a slowdown in the market for larger, more expensive properties as older homeowners are incentivised to retain their high-value homes to maximise tax relief. This could exacerbate the existing supply issues in the housing market, particularly for family homes.

Some experts are already calling for solutions. David Alexander, CEO of DJ Alexander Scotland Ltd, suggests increasing the IHT threshold to £500,000 for owners with children, allowing them to sell their homes without being penalised. He also proposes a zero rate of land and buildings transaction tax for final home purchases by older individuals, which could free up many larger properties for families.

As these changes unfold, it's clear that property owners and potential buyers alike will need to reassess their strategies. The landscape of property ownership and inheritance is shifting, and with it, the dynamics of the UK property market. Whether these changes will achieve their intended fiscal goals without stifling the property market remains to be seen. One thing is certain: the coming years will be crucial in shaping the future of property ownership and inheritance in the UK.

‍