Autumn 2024 Budget: Inheritance Tax Changes

5 December 2024

Reducing Tax

The Autumn Budget unveiled some changes to inheritance tax, reshaping the financial landscape for estates, pensions, and business assets.

These adjustments could significantly increase tax liabilities for many individuals, making proactive planning more critical than ever.

We take a look at the key inheritance tax changes, their implications, and key strategies to protect your wealth.

Pensions

Defined contribution pensions (such as SIPPs) can be passed on to your partner or the next generation.

Currently they pass free from inheritance tax but from 6 April 2027 they will form part of the chargeable estate and therefore be potentially liable to inheritance tax.

Any IHT due will be payable out of the pension fund itself.

The first thing to note is that if they pass to your spouse or civil partner they will be covered by the spousal exemption and therefore be tax free.

This will still be the case after 6 April 2027.

However to lose 40% of your pension when it goes down a generation could be costly for larger estates and pension pots.

Planning Opportunities

There is more a case now for taking money out of your pension.

If you haven’t yet taken your 25% tax-free lump sum (capped at £268,275) you can still do that – despite rumours that would be abolished in the budget.

It might not be worthwhile though, unless you plan to spend it or gift it away and survive seven years it will still be liable to IHT at 40% on death.

Remember that pension funds do not pay income or capital gains tax so they tend to do better with capital growth than standard investments.

Nil Rate band

One element that will need careful planning for some people is the impact adding pension funds to an estate may have on the ability to claim residence nil rate band.

That valuable relief, worth £70,000 in tax or £140,0000, begins to be lost once the deceased’s estate goes over £2 million.

That means estates between £2 and £2.35 million (or £2 and £2.7 million for a married couple) effectively pay 60% on assets in that bracket, including pension funds from 6 April 2027.

Planning that has carefully reduced an estate to £2 million may now have to be revisited.

Business Property and Farms

For many years business and agricultural assets have qualified for generous tax reliefs.

In many cases the whole of the value of those assets has been exempt from IHT completely.

In the budget the new chancellor announced that the following changes would happen from 6 April 2026:

The first £1 million of combined business and agricultural property will qualify for 100% relief
Any excess above £1 million will be taxable at 20% on death

It is worth noting that trusts will potentially qualify for the £1 million relief.

Lifetime Gifts

Also there will be anti-avoidance legislation for lifetime gifts made on or after 30 October 2024 where the death occurs on or after 6 April 2026.

In those situations the lifetime gift will only qualify for £1 million of relief.

The gift will still be subject to the seven year rule (so completely exempt once seven years have passed) and be subject to taper between three and seven years for any amount above the nil rate band.

The asset must be held by the donee at death for any relief to be due.

In addition, AIM listed and other shares listed other than on a recognised stock exchange currently count as business assets and attract 100% business relief after they have been held for two years.

From 6 April 2026 they will only attract 50% business relief.

Planning Opportunities

The restriction of full relief to the first £1 million of business and agricultural assets gives an opportunity to spread those assets more widely between family members and to consider using family trusts to hold some qualifying assets too.

If you have qualifying assets worth more than £1 million in a single person’s name now is the perfect time to do some planning to reduce the overall IHT burden and increase the amount to be inherited by the next generation.

Transfers between spouses

It is also worth noting that the £1 million allowance cannot be transferred between spouses and will therefore be wasted if all business assets are transferred to the spouse on first death.

Careful Will planning will be a crucial element to protect the maximum business relief due.

Trusts will qualify for their own £1 million allowance but only one such trust settled after 30 October 2024 per person.

For younger clients not ready to pass assets on it may be worthwhile taking out insurance to cover any IHT due over £1 million

Speak to us if this affects you.

And finally…

The nil rate band has been at the level of £325,000 since 2009/10 and the government has confirmed it will stay at the same rate until at least 2029/30.

That’s 20 years without increase, and years that have seen significant rises in property prices.

There’s no doubt that the government is looking to increase their IHT yield substantially over the next few years!

Getting in touch

If you are interested in finding out how we can help you reduce inheritance tax on your estate or that of a family member contact Jan Friend by email or on 01634 731390.