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.

Changes to the Inheritance Tax regime

During the Autumn Budget 2024, the government announced numerous reforms to the inheritance tax legislation. Two of the main changes effect agricultural property relief and business relief, in addition to brining the value of pensions on death within the scope of the Inheritance Tax regime.

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 £1 million allowance has been exhausted, tax free relief will apply at a lower rate of 50% for qualifying agricultural and business property.

Additionally, shares admitted to trading on the Alternative Investment Market, will no longer qualify for 100% business relief. Instead, the relief will decrease to 50%.

Increase to Inheritance Tax revenue

Tax receipts to HMRC have already increased, with HMRC receiving its highest ever Inheritance Tax receipt of £6.3 billion from April 2024 to December 2024. By 2029-2030, the OPR predicts that the Inheritance Tax receipts received by HMRC will rise to a staggering £13.9 billion. Over the next 20 years, a further £40 billion of Inheritance Tax revenue is predicted, due mostly to the impending changes to the taxation of pensions on death.

The changes to the Inheritance Tax legislation outlined in the Budget, increases to house prices, and the freezing of the nil rate band and residence nil rate band allowances until April 2030, are all contributing factors to HMRC’s increasing Inheritance Tax receipts. Although the residence nil rate band taper threshold remains at £2 million, including pension funds within the taxable estate on death will undoubtedly increase the Inheritance Tax burden for families.

Effective estate planning

The niceties of the tax legislation changes are yet to be announced, with the results of several consultations still awaited. There are however ways to assists families to navigate the tax changes, and positive action can be taken now.

Existing wills should be reviewed to ensure that all tax free allowances, and reliefs are properly utilised.

Discretionary Trusts can be used on first death to keep assets out of the survivor’s estate whilst maintaining financial security for the potential benefit of the survivor. Trusts will assist families to safeguard assets, whilst maintaining overall control.

Lifetime gifts of assets ought to be considered sooner rather than later, to begin the ticking of the “7-year clock”. Capital Gains Tax mitigation advice will be required, if assets other than cash, are to be gifted.

It is even more important to obtain adequate cover for Inheritance Tax liabilities, and the use of a life policy held in trust could assist to discharge this burden.

For estates that own assets that may qualify for business relief and/or agricultural property relief, the 100% relief is still available between now and 5 April 2026 on an unlimited basis. There are no limitations to the 50% relief.

The business relief/agricultural property relief £1 million allowance which will be introduced in April 2026, will renew every 7 years. HMRC has also announced that the £1 million cap will not be transferrable between spouses. Planning opportunities for families to make the most of the allowances are available and the following measures ought to be considered as preliminary steps:

1. Business and farm ownerships could be reorganised, with assets potentially transferred to spouses or to adult children.
2. Bare trusts could be established to benefit minor children.
3. Substantive trusts could be established to potentially benefit adult children and other beneficiaries.
4. Company articles of association, or partnership agreements should be reviewed to ensure that the management decisions of running the business or farm are being retained.
5. Valuation reports should be commissioned.

Married couples or those in civil partnership, who own businesses or farms should look to utilise their business relief/agricultural property relief allowances on first death. In the majority of situations, the most sensible option is to settle the business relief/agricultural property relief assets and to a discretionary will trust, with the surviving spouse and children named as potential beneficiaries of the trust.

HMRC is currently consulting on how the Inheritance Tax changes will impact trusts that hold business or agricultural property. For trusts established after 30 October 2024, the £1 million allowance will be divided between all trusts established after this date. These trusts will be subject to periodic charges at 3% to the extent that the value of the trust exceeds £1,325,000.

Trusts settled before 30 October 2024 will be brought into the new regime on the trust’s next 10-year anniversary charge which falls on or after 6 April 2026. Any exits from pre 30 October 2024 trusts will continue to attract unlimited 100% relief until the date of the trust’s next 10-year anniversary which falls on or after 6 April 2026

Trust settled before 30 October 2024 will each benefit from the £1 million allowance from 6 April 2026 even if the settlor transfers further qualifying agricultural or business property to these trusts.

Pensions

Another significant change to the current Inheritance Tax regime is that from 5 April 2027, the value of pensions on death will be included in the deceased’s taxable estate. Spousal exemption will apply if the death benefits are inherited by the surviving spouse or civil partner.

Pension arrangements should be reviewed as a result of this change. If pension funds are being funded or are left undrawn purely for estate planning purposes, the appropriateness of this arrangement ought to be re-considered. Equally, where pension funds are not required, taking the tax free cash element of the pension and gifting the same, through the use of the gifting from surplus income rules, could be a more attractive option.