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From an IHT perspective, the budget was largely received with a sense of relief. Several proposed changes to the regime including the removal of the residence nil rate band, imposing an overall limit on lifetime gifting, amending the annual allowance, eliminating taper relief on lifetime gifts, extending the period for potentially exempt transfers to ten years, and removing the exemption for regular gifts from surplus income, as well as increasing the APR and BPR nil rate band to £5 million did not materialise.
Nevertheless, this does not diminish the importance of keeping estate planning at the forefront, particularly before April 2027, when most pensions will fall under the scope of inheritance tax upon death.
By extending the freeze on the nil rate band and residence nil rate band allowances until April 2031, a growing number of estates will become subject to inheritance tax, and those already within its remit will face higher liabilities as asset values continue to rise.
The ongoing freeze of the combined APR and BPR nil rate band at £1 million until April 2031 presents continued challenges for farmers and business owners regarding estate planning. The announcement that unused allowances would be transferable between spouses offers some relief by simplifying planning to a degree, though it did not deliver the anticipated increase in the band.
Further clarity has been provided concerning the mechanics of handling IHT payments on pensions, which will enter the inheritance tax net from April 2027. This includes guidance on executors' responsibilities and their authority over payments and retentions from pension funds.
This year's changes were not transformative, unlike the significant reforms in 2024 affecting APR/BPR and pensions; however, speculation is likely to re-emerge in 2026. It is evident from modifications to passive income tax rates that Rachel Reeves is prioritising revenue collection efficiency over simplification of the tax system. The digitisation of tax, supported by AI and MTD, is expected to streamline the review and analysis of returns, reduce HRMC staffing costs, and enhance revenue collection, regardless of increased complexity.
Estate planning remains a continuous process, best initiated early and approached with long-term goals in mind, rather than relying on short-term solutions that may prove unsustainable with each new budget cycle.
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