In this post, we’ll review the existing landscape of IHT in the UK and explore the key takeaways from the latest Budget.
Thresholds
As announced at Autumn Budget 2024, the Inheritance Tax nil-rate bands are already set at current levels until 5 April 2028, and the Government will introduce legislation in the Finance Bill 2024-25 to fix these levels for a further 2 years until 5 April 2030. This means that the:
- Nil-rate band will continue at £325,000
- Residence nil-rate band will continue at £175,000
- Residence nil-rate band taper will continue to start at £2 million.
Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an inheritance tax liability.
New Rules
Pensions
Pensions have been long viewed as tax-efficient vehicles for funding retirement. They have gained significant attention as powerful tools in estate planning particular in the context of IHT.
However, defined contribution pension pots will now be deemed as part of the estate for IHT.
As the tax landscape continues to evolve, one strategy that may become more attractive for reducing Inheritance Tax (IHT) is taking pension benefits, especially tax-free cash, and making gifts during lifetime. It is also worth noting that transfers to spouses continue to be IHT free so there may be opportunity to remove pension assets from the estate before second death.
Overall, the change means people who were planning to preserve their pension pot to pass tax-efficiently to family (other than their spouse) after their death will need to revisit and amend their plans.
Business assets and farms
It was not a big surprise to see reliefs used by landowners and business owners targeted in the Budget.
Currently, assets such as shares in family businesses and agricultural property can benefit from 100% relief from IHT, provided certain conditions are met. However, this will no longer be the case under the new rules.
A cap of £1 million will be placed on the total relief available for business assets and agricultural land, with a 50% relief applying to any value above that cap. This shift has significant implications for family businesses and farming operations, which have traditionally relied on these exemptions to pass on their assets to the next generation without incurring large IHT bills.
Those not planning to sell during their lifetime may wish to bring forward succession planning by including other family members, such as adult children, into the business at an earlier stage. If they subsequently survive seven years, they stand to reduce the value of assets in the estate at the time of death through a successful PET. However, any potential Capital Gains Tax consequences of the transfer will need to be considered. Business and farm owners could, in addition to transfers of assets when appropriate, look to suitably structure life insurance to meet any liability.
To conclude, for some individuals, the changes to the Inheritance Tax (IHT) regime will require a complete rethink of their arrangements before the new rules take effect. For others, it may be the first time they need to seriously consider the implications of IHT on their estate planning.
How we can help
As part of our meeting to discuss your Will, we also discuss IHT and provide advice regarding the same. This can then be further progressed with estate planning if required.
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