Autumn 2024 Budget Changes on Inheritance tax
As UK inheritance tax (IHT) rules evolve, so does the landscape for estate planning. Recent announcements clarify yet underscore the need for proactive planning, especially for those with business and agricultural assets or significant pension savings. Below, we explore the key elements of the updated inheritance tax threshold, property relief adjustments, and the inclusion of pensions in IHT calculations.
The Inheritance Tax Threshold and Residential Nil Rate Band
The UK’s inheritance tax threshold, or nil rate band, remains at £325,000, frozen until April 2030. Despite inflation and rising property values, this freeze will pull more estates into the IHT bracket, creating a significant fiscal drag. For homeowners, the residence nil rate band of up to £175,000 further augments the tax-free allowance, bringing the combined potential to £500,000 per individual—or £1 million for married couples and civil partners.
Yet, this limit’s extension fails to account for the UK’s rising cost of assets, particularly in property. Homeowners and property investors are increasingly seeing their estates exceed these thresholds, raising the importance of understanding IHT planning tools, such as trusts, gifting, and charitable donations.
Reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR)
Effective from April 2026, substantial reforms are set to alter the relief available for business and agricultural properties, traditionally protected under IHT. Previously uncapped, both BPR and APR will now feature a £1 million lifetime allowance:
- £1 Million Allowance: Estates can apply a full (100%) relief on the first £1 million in combined qualifying agricultural and business property.
- 50% Relief Beyond £1 Million: For assets exceeding this threshold, the relief drops to 50%, resulting in an effective 20% IHT rate on values over £1 million.
AIM Shares and Unlisted Companies
Business relief changes will also reduce relief on shares in unlisted companies, including those on the AIM, to 50%. These assets, previously exempt from IHT, will now face a 20% effective IHT rate on their taxable value above £1 million.
The reduced relief will particularly impact family-run agricultural businesses, raising concerns over liquidity, especially in cases of unexpected shareholder death. Without substantial planning, such situations could lead to asset sales to cover tax liabilities.
Lifetime Allowance Cap on Reliefs for Trusts
For trusts, the government introduces a combined £1 million allowance on APR and BPR assets. From April 2026, this allowance will apply across qualifying property in a trust, impacting both the ten-year anniversary charge and exit charge. Trusts established before October 2024 may retain individual £1 million allowances, yet the government intends to equalise relief for trusts set up after that date, splitting the allowance among multiple trusts formed by a single settlor.
The significance of these changes cannot be overstated: trust holders need to reassess their estate plans to avoid future tax complications. Effective planning with financial advisors becomes crucial for trustees to maximise relief and avoid adverse tax effects on beneficiaries.
Inclusion of Pensions in the IHT Framework
One of the most impactful shifts in IHT policy is the inclusion of defined contribution pensions within the taxable estate. From April 2027, unused pension funds and death benefits from UK-registered and certain overseas pension schemes will attract IHT. Previously exempt, these assets now form part of the deceased’s estate for tax purposes, raising potential tax liabilities considerably:
- Marginal Rate Impact: After age 75, beneficiaries drawing from an inherited pension fund may face a combined tax of up to 85%, considering both IHT and income tax at the beneficiary’s marginal rate.
- Trustees’ Reporting and Payment Obligations: From 2027, pension scheme administrators (PSAs) will assume responsibility for reporting and paying any IHT on unused pension funds, replacing the role traditionally held by Personal Representatives (PRs).
Given these developments, the IHT exemption for pensions—long a pillar of tax-efficient inheritance planning—will soon disappear for most defined contribution schemes. Those with significant pension savings may wish to consult financial advisors about alternative planning routes or drawdown options to mitigate the new tax exposure.
Freezing of the Nil Rate Bands and Broader Implications
With the nil rate band and residence nil-rate band frozen until 2030, more estates will be drawn into the tax net. While these thresholds offer potential relief, they are insufficient against inflationary pressures and rising asset values. Moreover, the £2 million taper threshold for the residence nil-rate band, which applies when a primary residence is passed to direct descendants, limits relief for high-value estates, making estate planning vital.
Strategic Considerations for Estate Planning
For many, these IHT changes underscore the importance of reassessing estate strategies. Business owners, agricultural landholders, and individuals with large pension savings may find themselves newly liable for substantial tax costs. To navigate these reforms, consider:
- Gifting and Trusts: Gifting assets before death or using trusts effectively can help reduce the taxable estate, although new rules will complicate multiple trust formations after October 2024.
- Review of Pension Plans: With pensions becoming part of the taxable estate, financial planners might advise early drawdowns or alternative investment routes to ensure wealth transfers tax-efficiently.
- Business and Agricultural Assets Planning: As APR and BPR reliefs shrink, business owners and farmers must prioritise liquidity planning to avoid forced asset sales and explore trust arrangements that best leverage the remaining IHT relief.
Conclusion
As inheritance tax thresholds and reliefs evolve, UK estate planning must adapt. The upcoming changes demand robust, strategic planning to protect wealth, particularly for those with substantial property, business interests, or pension savings. Estate holders must proactively review their financial plans, taking advantage of available allowances and exemptions wherever possible. To craft an estate strategy tailored to your needs, contact Jack Ross, where we specialise in helping families and business owners in the North West and Manchester secure their legacies against an ever-shifting tax landscape. Visit us at Jack Ross for expert advice and support.