In October 2024 the so-called Autumn Budget was announced in which the UK Government announced a £40 billion package of tax increases. One of the areas most affected by the Budget announcements was inheritance tax (IHT). Indeed, some of the current IHT reliefs are regarded as too generous.
The announced changes will include the freezing of the nil-rate bands. Currently, an estate might be liable for IHT if it exceeds the nil band of £325,000 and the residence nil-rate band of £175,000. While the nil-rate band is available to all individuals, the residence rate only applies in certain circumstances, most commonly when a family home is passed on to direct descendants. For estates with net values of over £2 million, the nil-rate band taper continues to be in place which reduces the amount of the residence nil-rate band. Both nil-rate bands are now frozen until 2030. There was also a confirmation that the IHT rate remains at 40%.
The most significant changes relate to pension savings, business relief (BR) and agricultural relief (AR), notwithstanding the abolition of the non-domicile regime. Regarding pension savings, as of April 2027, any unused funds within a pension scheme and death benefits payable from a pension will form part of their estate, meaning that they will be subject to IHT. The reason for this is to prevent pensions from serving as "a vehicle for the accumulation of capital sums for the purposes of inheritance". The inclusion of the pension will thus likely affect the tapering of the residence's nil-rate band. It is, therefore, important to consult with an expert to find the best solution for your situation.
The restriction of IHT BR and AR to a combined value of £1 million will also affect many family estates and businesses. Previously, qualifying businesses and farms could be passed on free from IHT. However, from April 2026, a £1 million limit will be applicable, meaning that any assets above that limit would be imposed at a 20% IHT rate (instead of 40%). For quoted shares designated as 'unlisted' on the markets of recognised stock exchanges (e.g. AIM shares), a 50% rate of relief will be applicable and will be taxable at a 20% IHT rate. This now means it is even more important to plan your estate and look toward lifetime gifts rather than the transfer of assets upon death. We are aware that, for many relying upon their business for an income stream, such gifts are not feasible. However, this would be a means of avoiding the changes brought about by the Autumn Budget. Another potential solution is to examine the option of life insurance which is currently outside of the individual estate for IHT purposes.
Perhaps the most substantial change is that affecting non-domiciled individuals, or 'non-doms'. The new residence-based approach will apply as of April 2025. Non-UK assets will be subject to UK IHT for any 'long-term resident', defined as anyone who has resided in the UK for at least 10 of the last 20 tax years preceding the year of passing. The reasoning for this change is to end "the use of offshore trusts to shelter assets from IHT." For assets held in trust outside the UK, the situation will be quite complex as it will depend on the residence of the settlor. If the settlor is a long-term UK resident at the date of death, then the assets will be subject to an IHT of up to 40% as well as up to 6% on each 10-year anniversary. However, trusts settled prior to 30 October 2024 are exempted from the new rule.
These changes could affect your situation, so it is crucial to take action now to evaluate your specific family circumstances and assets. Do not hesitate to get in touch to discuss your requirements, even if you have already obtained estate planning advice, as these might be impacted by the changes.
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