In part 3 of our ‘Unpacking the Budget’ series, we explore the significant changes to the Inheritance Tax (IHT) regime introduced in the recent Autumn Budget. In this blog, we summarise what has and has not changed and offer some practical planning considerations to navigate the changes.
What hasn’t changed?
There was much speculation before the budget on potential IHT changes, so it’s firstly important to clarify what hasn’t changed:
- The headline IHT rates are still 40% for death estates, and 20% for lifetime transfers into trust.
- The Nil Rate Band (NRB) remains at £325,000, with a further Residence Nil Rate Band (RNRB) of £175,000 if the main residence is left to lineal descendants. These bands have been frozen until 2030.
- These bands can be transferred to a surviving spouse if unused.
- Potentially Exempt Transfers (PETs) can still be made during one’s lifetime and if the donor survives 7 years, these fall outside of the estate.
- Assets received by beneficiaries from an estate are received at market value (probate) for CGT purposes, often resulting in an uplift in base cost.
What has changed?
The chancellor announced some key changes to the IHT regime. Most notably, there are significant reforms to the IHT reliefs Business Relief (BR) and Agricultural Relief (AR), which will be effective from April 2026. The changes are as follows:
- BR and AR will continue to give 100% relief from IHT although there will now be a £1m combined limit for BR and AR.
- Thereafter above £1M, the relief is given at 50%, effectively resulting in an IHT rate of 20%.
- There is to be a consultation on the impact to trusts. It is expected that the £1m limit will be available to trustees in respect of 10-year anniversary charges and exit charges.
- For trusts settled before 30 October 2024, the £1m limit is expected to be per trust. For any trusts settled thereafter, the £1m limit is expected to be per settlor.
- BR for certain shares which are traded on a recognised stock exchange but designated as not listed (e.g. AIM), will also be halved to 50%, with no £1M exemption, effectively giving an IHT rate of 20%.
The chancellor also announced that unused pension funds and certain death benefits will fall within the scope of IHT from April 2027, having previously been completely exempt from IHT. Any IHT due can be funded from the pension pot itself, which should alleviate some of the double taxation for the beneficiaries, but this represents a major change in the pension space. Our colleagues at LFWM will be writing further on this specific subject very shortly.
What should I do?
Many businesses and families will have been planning to rely on the 100% BR or AR relief on an uncapped amount. In the past, this meant beneficiaries wouldn’t suffer a “dry” IHT charge on business and agricultural assets. These assets are often illiquid, making it difficult to realise cash in order to fund the IHT, and can affect the business’ viability going forwards.
Whilst the changes aren’t being implemented until April 2026, it will be important to plan to ensure that the impact is understood, planned for, and action is taken. Our recommended points for consideration are as follows:
- Revisit any IHT planning previously undertaken. If you have previously had IHT advice which relied in any way upon BR or AR, this advice ought to be reviewed and updated to ensure it reflects the current position.
- Review wills and letters of wishes to ensure these make use of reliefs and exemptions. It’s common, for example, for spouses to have mirrored wills where all assets pass to one another. Whilst this will take advantage of the spousal exemption, the £1m BR or AR for the deceased will be lost. We will, perhaps, see more Will Trusts being established at death to make use of BR or AR.
- Consider the impact on any existing trusts. Trusts will be subject to the £1m limit to BR or AR which may not cover all assets, thus creating dry tax charges for 10-year anniversary and exit charges. The IHT due can be paid in instalments (spreading up to 10 years) but late payment interest will be applicable, and with the interest rate going up to 9% in April 2025, this will be an expensive option.
- Accelerate succession planning. Whilst these changes are significant, it may perhaps encourage owners to consider succession planning earlier. Gifts of assets qualifying for BR would ordinarily qualify for gift (holdover) relief, on which there is no limit, so assets can be given to the next generation during one’s lifetime. The gift would, however, be a Potentially Exempt Transfer (PET) subject to the 7-year survivorship rule.
How can we help
If you are concerned about the announced IHT changes, or feel that a review of your IHT and estate position would be worthwhile, please feel free to get in touch with our Tax Directors Matthew Spencer (matthewspencer@lubbockfine.co.uk) or Gail Swinburn (gailswinburn@lubbockfine.co.uk).
