Budget changes and the impact on Inheritance Tax Planning
The recent changes announced by Rachel Reeves in the UK Autumn Budget 2024 around Inheritance Tax are likely to raise concerns for those with even modest property, assets and investments. With record levels for the value of property, individual wealth is increasing year on year. That means over time, the value of a person’s estate on death will be larger. The UK budget has announced changes which will impact on estates and bring pensions into estates for Inheritance Tax (IHT) charging for the first time.
Freeze on Threshold extended for a further two years
The threshold below which people will pay no IHT is £325,000. This is called the “nil-rate band” If your net estate is less than that figure, your estate will pay no IHT. In addition, there is a residence nil-rate band of £175,000 which applies to those who are leaving the family home to their children or grandchildren. However, if your estate is worth £2 million or more, the residence nil-rate band will reduce by £1 for every £2 of net estate over the £2 million figure.
The nil-rate band of £325,000 had already been frozen by previous governments until 2028. The chancellor has extended the threshold freeze until 5th April 2030. That means as the value of estates grow, more estates are likely to become subject to IHT.
Unused Pensions to be subject to IHT
The government is closing a loophole which allowed pensions to be used as a means passing down wealth without being subject to IHT. At present, an unused pension sits outside the estate of the deceased with the deceased, during their lifetime, being able to nominate people to receive the value of their unused pension fund in the event of their death. This meant that the pension value would not form part of the deceased’s estate and that the pension trustees would make payment of the value of the unused pension fund to the nominated persons. This can currently still be done with the value of the unused pension fund not being included in the estate for IHT purposes.
The government proposes to change that from April 2027 when the value of the unused pension fund will be included for IHT purposes. The government has launched a consultation on how this will work in practice. It seems that the obligation to report and pay the IHT will fall on the pension fund trustees.
However, there are questions as to how this might work in practice given that if one spouse or civil partner nominates their surviving spouse or civil partner to receive their unused pension fund, there should be no deduction of IHT because IHT is not charged on transfers between spouses or civil partners.
This does mean, however, that if you have an unused pension fund and nominated anyone other than your spouse or civil partner to receive this in the event of your death, then from April 2027, the value of that unused pension fund will be subject to IHT.
Changes to Agricultural and Business Property Relief
Agricultural property relief and business property relief are being limited from 6th April 2026. Up until then, relief of 100% is available on qualifying agricultural and business property and are excluded from IHT calculations on death.
However, from 6th April 2026, that relief will be restricted to the first £1 million of combined agricultural and business property.
The purpose of agricultural property relief and business property relief were to help protect family farms and businesses. The view that seems to be taken is that when combined with the nil-rate band and residence nil-rate band, there is a further £1 million of relief available making the total allowance available up to £2 million.
However, if the nil-rate band and residence nil-rate band are unavailable, and agricultural and business property are included in the estate, after deduction of the £1 million allowance, IHT will be charged at 50% of the IHT rate on the balance. That means for any agricultural or business property included in the estate, IHT will be charged at 20% on the balance over £1 million.
Estate planning helps mitigate the impact of IHT
The changes in the budget emphasise the need for effective estate and IHT planning. By planning in advance, you can take steps to mitigate the impact of IHT. Take advantage of the allowances and options to reduce the exposure to the impact of Inheritance Tax on your estate.
Experienced estate planning solicitors North Berwick and Dunbar, East Lothian
Our solicitors have years of experience in dealing with all aspects of estate and inheritance tax planning in North Berwick and Dunbar in East Lothian and across Scotland. Estate planning starts with making or reviewing your Will. If you would like to discuss how you might mitigate against the impact of IHT on your estate, please get in touch with us.