The October 2024 Budget introduced significant changes to inheritance tax (IHT) in the UK, marking a shift in policy under Chancellor Rachel Reeves. These reforms impact estate planning, agricultural and business assets, and pension funds. NMTBP highlights the fundamental changes:

Freeze on the IHT nil-rate band and the residence nil-rate band

Reeves 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 5^th April 2030. This means that qualifying estates 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). Qualifying estates of a surviving spouse or civil partner can pass on up to £1 million tax-free. Without 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

Regarding pension taxation, Reeves stated 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 6^th 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”. The chief issue is whether there will be ‘double taxation’, i.e. IHT of up to 40% on the pension followed by the levying of income tax (as happens now) when funds are withdrawn for the pension by beneficiaries

Changes to APR and BPR

APR currently allows a person to pass on the agricultural value of some property in the UK free of IHT. This includes land or pasture used to grow crops or rear animals and farm buildings where all conditions are met

Assets that may qualify for BPR include a business or an interest in a business; land, buildings or machinery used in a business; and shares in an unlisted company. Where BPR is available, the value of an asset can be reduced by 50% or 100% when working out the IHT due

However, the Budget announced that the government would reform APR and BPR on April 6, 2026. The 100% relief rate will continue for the first £1m of combined agricultural and business property, falling to 50% after that. The rate of BPR will also fall to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM. This creates an effective IHT rate of 20% for any amount over £1 million.

Assets only qualifying for 50% BPR will not use up the £1m allowance

The £1m allowance will also apply to trusts. In addition, the new rules will apply to lifetime transfers on or after 30 October 2024, where the donor dies on or after 6 April 2026

It could have been worse!

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 less extensive than some were expecting or perhaps fearing. It seems the Chancellor, in acknowledging people’s firmly 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

While subject to much speculation, the announced IHT reforms do not include any changes to the potentially exempt transfer rules. There has been no indication of any extension beyond 7 years, the length of time an individual needs to live following the making of a gift in order for that gift to be treated as exempt from IHT

With several technical consultations published and others awaited, expect to see further details on the above reforms in the coming months. Watch this space

Planning considerations under the new IHT rules

These significant changes have left many people concerned about how their beneficiaries will be able to manage their estates. This is particularly true for family farms or small businesses, which are now faced with the prospect of needing to raise a large sum of money to avoid a forced sale

However, there are still many planning options to help mitigate this risk. In our next ‘Wealth’ article, NMTBP will examine these options in more detail