Budget 2024: Changes to Inheritance Tax
Budget 2024: Changes in relation to Inheritance Tax
In Rachel Reeves first budget 2024 she set out changes in Inheritance Tax Allowances. Here we have set out what those changes could mean for you.
What are the Inheritance Tax Allowances?
Inheritance Tax becomes payable when a person’s estate exceeds the available allowances. In simple terms, the first £325,000, known as the Nil rate Band, can be passed on death with no Inheritance Tax payable. There is no tax payable on the value of the estate up to this sum, and this has been the case since 2009. The Nil Rate Band at £325,000, has again been frozen and will remain at that level now until at least 2030. As more years pass, the number of estates which exceed this threshold will likely increase, and therefore more people will be caught by Inheritance Tax. In addition, if you pass your home to your children or grandchildren the total IHT allowance can increase to £500,000. These allowances relate to a single person, for a married or civil partnership couple these allowances can be transferred following the first death to the surviving spouse meaning their total IHT allowance would be £1m.
Pension arrangements can sometimes be used to mitigate the impact of Inheritance Tax. Currently, a pension falls outside of a person’s estate for Inheritance Tax purposes. However, in the recent budget, the government confirmed that it will bring unused pension funds and death benefits payable from a pension scheme into a person’s estate for Inheritance Tax purposes from the 6th April 2027.
The current position is that if death occurs when you are under 75 years of age then no tax applies, but after 75 the beneficiary of your pension, will have to pay income tax. If your finances allow then you can arrange for funds to be paid into your pension fund (up to the maximum current pension limit), in the knowledge that this can then be passed on when you die free of Inheritance Tax. However, the budget reforms intend to change the rules and from the 6th April 2027, any death benefits payable or unused pension funds will be included in the value of the deceased person’s estate for Inheritance Tax purposes.
It will therefore be important to seek professional advice as to your pension arrangements as previous planning may no longer be effective. These changes will likely mean that in the years ahead, the number of estates which will be subject to Inheritance Tax will increase significantly. In the year 2021/2022, 4.4% of death estates paid Inheritance Tax, but going forward, given these changes announced in the budget, the number of estates paying Inheritance Tax will surely increase.
Previously, business owners and farmers, have benefitted from Inheritance Tax reliefs, such as Agricultural Property Relief and Business Property Relief, which means that no inheritance tax is payable on agricultural or business assets. However, following the budget, from the 6th April 2026, relief at the rate of 100% is to be capped at the first £1,000,000 and the value of any agricultural property or business property exceeding £1,000,000 will only attract relief at the rate of 50%. This could potentially force farming families, to sell some or all of the property to meet the inheritance tax bill.
Certain investments such as AIM listed shares, if held for more than 2 years prior to death previously qualified for Business Property Relief, at the rate of 100%. Again, this is set to change and the applicable rate of relief going forward will be restricted to 50% from April 2026.
It is essential given all of these changes, that clients do seek professional estate planning advice, both from