The Chancellor Rachel Reeves announced a series of reforms to the UK Inheritance Tax (IHT) regime as part of the Autumn Statement on 30th October 2024. Below, we provide a summary of those key changes.
Freeze on IHT nil-rate band and residence nil-rate band
It was announced that the freeze on the IHT nil-rate band and residence nil-rate band (including taper) will be extended for another 2 years, until 5th April 2030. This means that qualifying estates for individuals can continue to pass on up to £500,000 (a combined figure of the nil-rate band set at £325,000 and the residence nil-rate band set at £175,000) and qualifying estates of a surviving spouse or civil partner can pass on up to £1 million tax free. In the absence of such an extension, the bands would fall to be indexed in line with the Consumer Price Index. This measure therefore keeps the thresholds artificially low.
Taxation of unused pension funds and death benefits
In respect of pensions taxation, it was announced that most unused pension funds and death benefits payable from a pension would be brought within a person’s estate for IHT purposes with effect from 6th April 2027, with pension scheme administrators to become liable for reporting and paying any IHT due.
With a technical consultation published alongside the Budget on the processes required to implement the changes and a further consultation on draft legislation to follow, there is not much detail available at this stage. However, the policy intention is clear “Pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance”.
Reforms to Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”)
The Government has committed to extending, from 6th April 2025, the existing scope of APR to land managed under an environmental agreement with, or on behalf of, the UK government, Devolved Administrations, public bodies, local authorities, or approved responsible bodies. This is perhaps not surprising as it is merely confirmation of a measure proposed under the previous Conservative government.
Reforms to the value of property eligible for 100% tax relief under APR and BPR have been announced, to take effect from 6th April 2026. The existing 100% rate of tax relief will continue to be available, however, it will be limited to the first £1 million of property qualifying for APR and BPR only. Any qualifying assets over this new £1 million allowance would be eligible for a reduced 50% tax relief (i.e. an effective IHT rate of 20%).
Notably, in respect of shares which are not listed (e.g. AIM shares), these will fall outside of the £1 million allowance and only ever be eligible for 50% tax relief.
It is intended that the £1 million allowance would equally apply to property in trusts falling within the settlement’s regime, and hence be taken into account in respect of IHT due on each 10-year anniversary charge and exit charge on relevant property trusts. However, we await a technical consultation due for publication in early 2025 to understand in more detail how the APR and BPR reforms will apply in the trust context. These reforms are part of the Government’s stated intention to protect family farms and businesses and to make the IHT system fairer and more targeted, by restricting the availability of APR and BPR for the wealthiest estates.
Foresight’s comments
While the reforms to IHT in this Budget are forecast to generate a significant amount of revenue by the final year of the forecast period, they are not as bad as some were expecting, or perhaps fearing.
It seems the Chancellor, in acknowledging people’s strongly held desires to pass down money to children and grandchildren, has taken a targeted approach to IHT reforms seeking to generate revenue by working to equalise the currently unbalanced effective IHT rates between larger and smaller estates. With several technical consultations published, and others awaited, we are expecting to see further details in relation to the above reforms in the coming months.
For those who own businesses or farms, it will be a difficult 5 years ahead, but with careful planning on 1st & 2nd death we can already see opportunity to double the BPR/APR allowances to £2 million on top of the NRB & RNRB IHT allowances available (up to £1 million). As for unused pensions, for now, these can still pass free of IHT and there is still time for these rules to change or be tweaked by the government.
One thing is clear though, whether you have a modest estate, a working persons estate or a high value estate, having your estate planning in place prior to any events happening is more important than ever before – especially if you want to make sure your monies pass on to your chosen beneficiaries.
If you feel you need to review your estate planning or take a more generational tax planning approach or just want to know where you stand and the options available – please do not hesitate to contact us for a review.