Changes to the Inheritance Tax regime

In our previous article, Understanding the rising impact of Inheritance Tax, Jason Lloyd, Independent Financial Adviser, examined the growing Inheritance Tax burden and strategies for effective estate planning. In this follow-up article, Catrin Wigley, Estate Planning Partner, explores the changes announced in the Autumn Budget 2024 and their implications for individuals and families.

Key Inheritance Tax reforms

During the Autumn Budget 2024, the government introduced significant reforms to Inheritance Tax legislation. Two of the main changes affect agricultural property relief and business relief, while a major shift will bring pension values on death within the scope of Inheritance Tax.

From 5 April 2026, a new £1 million allowance will apply to the combined value of property that qualifies for 100% business relief or 100% agricultural property relief. Once this allowance is exhausted, the relief will reduce to 50% for qualifying agricultural and business property.

Additionally, shares admitted to trading on the Alternative Investment Market (AIM) will no longer qualify for 100% business relief. Instead, this relief will be capped at 50%.

Projected increase in Inheritance Tax revenue

The latest tax figures highlight a continued rise in Inheritance Tax receipts. In 2024, HMRC recorded its highest-ever Inheritance Tax revenue of £6.3 billion from April to December alone. The Office for Budget Responsibility predicts that Inheritance Tax receipts will increase to £13.9 billion by 2029/30, with an additional £40 billion expected over the next 20 years. This surge is primarily driven by changes to the taxation of pensions on death, frozen nil-rate bands, and rising property values.

Estate planning strategies amid Inheritance Tax changes

While details of the new tax legislation are still emerging, proactive estate planning remains essential. Below are key steps individuals should consider:

• Review wills: Ensure that all tax-free allowances and reliefs are fully utilised.
• Use discretionary trusts: These can help keep assets outside the survivor’s estate while maintaining financial security.
• Consider lifetime gifting: Starting the “7-year clock” sooner rather than later can mitigate Inheritance Tax, though Capital Gains Tax implications should be reviewed.
• Life insurance in trust: A life policy held in trust can help cover Inheritance Tax liabilities.

For those holding assets that qualify for business relief and agricultural property relief, 100% relief remains available on an unlimited basis until 5 April 2026. The new £1 million allowance, which will be introduced in April 2026, will reset every seven years but will not be transferable between spouses.

Trusts and Inheritance Tax planning

The government is consulting on how the Inheritance Tax changes will impact trusts holding business or agricultural property. Key considerations include:

• Trusts established after 30 October 2024 will share the £1 million allowance and may face periodic charges.
• Trusts created before this date will transition into the new regime at their next 10-year anniversary charge post-6 April 2026.
• Pre-30 October 2024 trusts will each receive the £1 million allowance from 6 April 2026, even if additional qualifying assets are later added.

Pensions and Inheritance Tax

One of the most significant changes is the inclusion of pension values in an individual’s taxable estate from 5 April 2027. While spousal exemption applies if the death benefits are inherited by a surviving spouse or civil partner, this change will have major implications for estate planning.

Individuals with pension funds earmarked for estate planning purposes should review their arrangements. In some cases, withdrawing the tax-free cash element and gifting it using surplus income rules may be a more tax-efficient approach.

Estate planning advice

With Inheritance Tax changes set to reshape estate planning, early action is crucial. Reviewing Wills, restructuring business or farm ownership, and exploring trust options can help mitigate tax burdens. For personalised strategies, speak with our team of estate planning specialists.

For further insights, read Understanding the rising impact of Inheritance Tax.