The 2024 Autumn Budget introduced a series of significant changes to Inheritance Tax (IHT), many of which are due to come into play from April 2025.
These changes could potentially impact estates, pensions and individual taxation.
In this article we’ll explore the key changes in full, what they mean and how you can best plan for the future.
Unused pensions to be included in an estate.
Inheritance Tax is a tax that an individual will pay on the estate of someone who’s died.
There’s normally no Inheritance Tax to pay if either the value of the deceased’s estate is below the £325,000 threshold or they leave everything above the threshold to a spouse, civil partner or a charity. There is also a £175,000 residence nil-rate band available to those passing on a qualifying residence on death to their direct descendants. It was introduced in the tax year 2017 to 2018, originally starting at £100,000 and increasing by £25,000 each year. In 2020/21, it reached the current threshold of £175,000. By comparison, the taper threshold has been set at £2 million since the residence nil-rate band was introduced.
The residence nil-rate band will continue at £175,000 and will be fixed for a further 2 years until 5th April, 2030.
Currently, in most cases, pensions are not included in an estate for the purposes of an Inheritance Tax calculation.
What is changing?
From April 2027, unused pension funds and lump-sum death benefits payable from registered pension schemes will potentially be liable to Inheritance Tax.
A lump sum death benefit payment is a lump sum paid from a pension scheme following the death of the member or beneficiary.
If someone dies before their 75th birthday, most lump sums paid from their pension are tax-free up to a limit. If someone dies after their 75th birthday, the person receiving a lump sum pays income tax like they would on other income.
In this instance, if the individual dies at or after age 75, and the nominated beneficiary is not a spouse or civil partner, that recipient may be impacted by double taxation. This is due to the fact that, as pension death benefits for individuals aged 75 or over are already subject to Income Tax at the nominated beneficiary’s marginal rate, under the new legislation there would therefore be scope for both Inheritance Tax and Income Tax to be payable in this scenario.
We will keep you updated if anything is confirmed – make sure you subscribe to our Do More With Your Money Podcasts for our regular content and reactions.
Inheritance Tax nil rate band frozen until 2030.
Within Inheritance Tax, there are two nil-rate bands. Subject to available reliefs and exemptions, tax is payable to the extent the net value of the estate exceeds these nil-rate bands.
The £325,000 nil-rate band is available to all individuals and can be set against all asset types on their death, while the £175,000 residence nil-rate band is available to those passing on a qualifying residence on death to their direct descendants. If the value exceeds £2 million, a taper is applied and the relief is reduced by £1 for every £2 that the value exceeds this amount.
Any unused nil-rate band or residence nil-rate band following the death of an individual can be transferred to their surviving spouse or civil partner.
What is changing?
Inheritance Tax nil rate band and residence nil rate band thresholds are to remain frozen until April 2030 (previously frozen until 2028).
Individuals will continue to be entitled to £325,000 nil-rate band and £175,000 residence nil-rate band (RNRB).
The RNRB remains available only if your main residence is inherited by direct descendants.
This means there will have been no changes to the nil rate band threshold since April 2009 and no changes in the RNRB thresholds since April 2020.
From the most recent statistics available in a Government document released in July 2024, there were approximately 27,800 estates subject to Inheritance Tax per year.
Inheritance Tax relief on private assets and businesses to be capped.
Business Relief (previously called Business Property Relief) is a longstanding relief from Inheritance Tax.
First introduced in the 1976 Finance Act, its purpose is to reduce IHT charges arising on the transfer of qualifying business interests during a person’s lifetime or on their death, to allow the business to continue.
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
You can also pass on some agricultural property free of Inheritance Tax, and this can be done either during your lifetime or as part of your will.
What is changing?
As announced at Autumn Budget 2024, the government will reform these reliefs from 6th April, 2026. The existing 100% rates of relief will continue for the first £1 million of combined agricultural and business property.
The rate of relief will be 50% thereafter, and in all circumstances for shares designated as ‘not listed’ on the markets of recognised stock exchanges, such as AIM.
Inheritance Tax relief on AIM shares to halve.
The Alternative Investment Market (AIM) is a specialist unit of the London Stock Exchange (LSE). The aim is to help smaller companies secure significant capital for growth from the public market, which can range between £1m and £50m. These are companies that would not qualify to be listed on the LSE.
They currently benefit from 100% Business Relief, exempting their full value from IHT, if held for at least two years.
What is changing?
It was announced in the Budget that AIM shares will benefit from Business Relief at half the current rate, meaning that IHT will be payable at an effective rate of 20% (rather than 40%). AIM shares do not use up the £1 million IHT-free Business Property Relief allowance.
AIM stocks let shares be passed on tax free if held for at least two years before an individual dies.
You can view our latest Do More With your Money podcast below to hear our expert panel discuss IHT changes from the Budget in further detail:
We’ll be sure to communicate any future policy and taxation changes that could affect your money as they unfold, while you can also subscribe to our YouTube channel to view our regular Do More With Your Money episodes.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors. Pension eligibility and tax rules apply.
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True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
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