Rachel Reeves unveils major inheritance tax changes in Budget - with some payments now 'exempt'

Key measures include exempting compensation from the Infected Blood scheme and allowing agricultural and business property relief allowances to be transferred between married couples.

At the same time, inheritance tax thresholds will remain frozen for an extra year until 2030-31, a move that has already prompted criticism from financial experts.

The Chancellor declared that all compensation from the Infected Blood scheme would be completely free from inheritance tax, irrespective of how these funds are inherited by beneficiaries.

Ms Reeves told MPs during her Commons address: "I will not allow the legacies of Conservative neglect to stain our society."

She emphasised that taxpayers' money should address historical wrongs and strengthen public services rather than being squandered on inefficiency.

The exemption ensures that victims' families can receive their full compensation without tax implications when funds are passed to the next generation.

The Chancellor said: "I will exempt all payments from the Infected Blood scheme from inheritance tax regardless of the circumstances in which those payments are passed down to children.

"That is how we should be spending taxpayers’ money; on dealing with injustices and on strong public services, not on waste and inefficiency.

Last year's Budget set out reforms to agricultural property relief (APR) and business property relief (BPR), which will come into force in April 2026.

From that date, the first £1million of combined business and agricultural assets will remain fully exempt from inheritance tax. Any value above £1million will no longer receive full relief and will instead be subject to 50 per cent relief, meaning an effective inheritance tax rate of 20 per cent on the excess.

Alongside this, the government confirmed today that the £1million allowance for full APR and BPR will be transferable between married partners from 6 April 2026.

The change has been widely welcomed by experts, who say allowing couples to share the allowance will make passing on farms and family businesses significantly simpler.

David Chismon, Partner at Saffery, called it long overdue, saying: "There has been persistent lobbying over the last 12 months to make this change and it is very welcome that the Government has finally decided to see sense."

He noted that the move will simplify estate administration, though many property owners have already restructured assets since transfers were initially ruled out.

Jeremy Croysdill, Executive Director of Wealth Planning at Brown Shipley, described the reform as "one of the few surprises in today’s Budget", adding that it "will reduce the burden for many married individuals who want to pass their business to the next generation, but whose estates do not have sufficient liquidity to pay any inheritance tax charge."

Will Johnstone, Partner at MHA, called the update a "welcome common-sense simplification", saying it mirrors the transferable nil-rate band introduced in 2007.

He suggested the measure should be "revenue-neutral for any well-advised taxpayer", arguing that it removes unnecessary complexity from the inheritance tax framework on farming and business estates.

Separately, another announcement made was the freeze on inheritance tax thresholds which has now been extended for another year. This means the £325,000 nil-rate band and the £175,000 residence allowance will now remain unchanged until 2030–31.

By the end of this extended freeze period, the Treasury anticipates collecting £14.5billion annually from the levy.

Rachael Griffin, tax and financial planning expert at Quilter, warned: "The Chancellor has extended the freeze on inheritance tax thresholds for a further year to 2030-31, at which point the government will rake in a whopping £14.5 billion per year from grieving families."

The decision maintains the current system without addressing calls for comprehensive reform. The prolonged threshold freeze means increasing numbers of households with moderate wealth will face inheritance tax bills as property values climb.

The £325,000 inheritance tax allowance and the £175,000 home allowance have not increased in line with rising property prices, especially in areas where homes are expensive.

Financial experts say freezing the thresholds is effectively a way for the government to raise more money, changing inheritance tax from a levy on the very wealthy into something that increasingly affects ordinary families.

Neil Kilcoyne argued: "The government frames this as fiscal responsibility, pointing to record inheritance tax receipts of over £8billion last year. But critics rightly call it a cynical revenue grab."

He questioned whether the levy still serves its intended redistributive function: "Inheritance tax was once sold as a levy on privilege. Today, it risks becoming a penalty on prudence - punishing families who worked hard, saved diligently, and hoped to pass something on."

The freeze represents "taxation by inertia" rather than genuine policy reform, according to experts.