The dust has settled on the Budget, but it has raised many questions. If you’ve been following the news, you may have noticed some significant changes to the Inheritance Tax (IHT) regime. Not too long ago, we discussed the possibility of abolishing IHT altogether under the previous government. However, the current situation is quite different—it’s the opposite. Some significant changes to IHT were announced in the Budget.
In the recent Budget announcement, it has been highlighted that investments such as pensions will now fall under the scope of Inheritance Tax, accompanied by adjustments to certain reliefs. Let’s take a moment to explore these changes in greater detail.
You can find the full announcements of the budget here.
Rates and thresholds
The current IHT thresholds and the 40% rate will not change. The current IHT thresholds will remain in place until 2030.
Many of you will be disappointed by this because inflation means that more of you will be caught by IHT.
We understand that this situation can be concerning, particularly because the freezing of income tax thresholds has resulted in more individuals facing higher tax rates. IHT will now be a tax faced by many more of us.
So let’s look at what changes were actually announced and then how we can help.
IHT thresholds
What is IHT? Upon your passing, a substantial tax of 40% is levied on your total assets. This includes everything you own—whether it’s liquid cash, valuable investments, exquisite pieces of fine jewellery, or even your residence. This tax applies to the entire value of your estate, significantly impacting what is ultimately passed on to your heirs.
Certain exemptions, such as assets passed to a surviving spouse, are transferred tax-free. However, IHT will apply upon the second death. Therefore, it is advisable to engage in tax planning rather than postponing these important decisions.
You are also entitled to certain tax-free allowances, and here’s a reminder of what these are:
- You will continue to be entitled to a £325,000 Nil-Rate Band (NRB) and a £175,000 Residence Nil-Rate Band (RNRB).
- The RNRB remains available only if the house is inherited by direct descendants like your children (including stepchildren) and grandchildren.
- The RNRB will continue to be clawed back at a rate of £1 for every £2 where the net value of the estate exceeds £2 million.
- The allowances in relation to lifetime gifts for IHT also remain unchanged.
Agricultural Property Relief (APR) and Business Property Relief (BPR)
APR provides an opportunity for individuals to transfer the agricultural value of certain properties in the UK without facing Inheritance Tax.
This relief is applicable to land and pastures used for crop cultivation or animal husbandry, as well as farm buildings, as long as all relevant conditions are satisfied.
Furthermore, assets that may qualify for BPR include various business-related properties.
This can encompass a business or an ownership interest in one, as well as land, buildings, or machinery employed in a business, and shares in a non-listed company.
Utilising BPR can significantly reduce the value of an asset by 50% or even 100% when calculating the IHT, making it an advantageous strategy for estate planning.
The Chancellor has announced an important change to both of these relief programs starting next year, which could greatly impact many individuals and businesses.
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From 6 April 2025:
APR will now encompass land managed under an environmental agreement with the UK government, devolved governments, public bodies, local authorities, and other approved responsible bodies.
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From 6 April 2026:
Relief will be maintained at 100% for combined agricultural and business property valued up to £1 million.
For values exceeding £1 million, the relief rate will decrease to 50%. This change will create an impact on those with values of over £1 million.
BPR will also be reduced to 50% for shares classified as ‘not listed’ on recognised stock exchange markets, including the Alternative Investment Market (AIM).
This decision will affect small businesses and SMEs like many of our clients. Family-owned businesses passed down through generations may be impacted.
Pensions
Currently any undrawn money in your personal pension fund is passed down to the beneficiary on your death and is outside the scope of IHT. This will no longer be the case from next April 2027.
From 6 April 2027:
- Any unused pension funds will become part of the estate for IHT purposes and be liable to tax.
- Currently, pensions held within trust fall outside the scope of IHT. This measure aims to:
- Crackdown on pensions being used for tax planning purposes.
- Increase the number of estates liable to IHT.
- Stop individuals from accumulating wealth in a tax-free environment within their pension.
- IHT due on the pensions will be paid from the pension fund itself.
This is a significant change, and those who have planned for IHT will need to reassess, as the figures will appear different.
Other Announcements
- The government is set to invest £52 million in digitising the IHT system from 2027 to 2028. This initiative will result in a modern and user-friendly service, ensuring a streamlined process for submitting returns and paying taxes.
- The current domiciled-based regime will be replaced next April with a new residence-based regime following the abolishment of the non-UK domiciled rules.
Next Steps
Here’s more information on how inheritance tax works so you can understand your position.
You may already have done some planning for IHT. This being the case, the announcements in the budget will mean you need to look at the planning again. Please contact your normal manager at Myers Clark so we can have another look.
If you are not yet working with us here’s more about us and how we work.