How Will the Autumn Budget 2024 Changes to Inheritance Tax Impact You?

Currently, the majority of agricultural assets and those used in the trading business benefit from 100% relief from IHT due to APR and/or BPR.  

However, from 6 April 2026, the 100% relief will continue on the first £1 million of combined agricultural and business assets. Any assets over £1 million will qualify for a 50% relief rate, with IHT being paid at 20% on any assets above the £1 million threshold.

While much focus has been on the phenomenal impact these changes will have on farms, the updates equally apply to those businesses that were previously exempt from IHT under BPR. While it appears that in these circumstances, there will be a 10-year period to pay the IHT due, this could cause major issues even for businesses that are making a healthy profit and, at the very least, require business owners to plan ahead.

The Nil Rate Band allowance of £325,000 and the Residence Nil Rate Band allowance of £175,000 will remain fixed until 2030. This means qualifying estates can leave up to £500,000 or, due to the transferability of allowances between spouses, £1 million for a married couple or civil partners to beneficiaries without attracting an IHT liability. However, rising asset values over the next five years will inevitably bring more individuals into the IHT net or increase the tax burden for those already subject to it.

Currently, most pension benefits on death can be passed on free of IHT. However, from April 2027, death benefits will be included in the IHT regime. This means a 40% IHT charge could apply to the value of those benefits in estates already subject to IHT, potentially pulling many estates into the IHT net that are not currently subject to IHT.

A lot of our clients who currently have non-taxable estates and without appropriate planning will be subject to IHT when pensions are brought into the equation. However, this rule change could result in a double whammy for the unwary. Where an individual’s assets, usually a widow or widower who has inherited the assets of their spouse exceed £2 million, the Residence Nil Rate Band is decreased by 50p for every £1 that an estate exceeds £2 million. For instance, if a surviving spouse with children has assets of £2.7 million or more, there is no Residence Nil Rate Band reducing the IHT allowance available on death to £650,000.

The inclusion of pension benefits in the IHT calculation will not only introduce a potential 40% charge on these benefits but could also push more estates above the £2 million threshold. This can trigger a reduction in the IHT allowance, effectively creating a 60% IHT charge on these additional assets.

For many people, some form of increased IHT exposure will not be possible to avoid, but most can take steps to reduce or even eliminate the impact.

Possibly the most important tip is to review Wills where an individual or couple anticipates their estate(s) could be subject to IHT in the future. For example, if a couple with children expects their combined assets to exceed £2 million, their Wills can be prepared so that some or all of the assets of the first person to die are directed to a discretionary trust. This helps reduce the value of the surviving spouse’s estate, helping to keep it - including pension benefits – below or close to the £2 million threshold.

This approach is particularly important where couples who own assets qualify for APR or BPR, as the £1 million relief referred to in the APR and BPR section above is not transferrable between spouses. Thoughtfully drafted Wills, taking into account the new legislation, will, in many cases, ensure that relief extends to £2 million.

As part of an estate planning review, ensuring appropriate pension documentation is in place is key. It is important to ensure the appropriate flexibility exists within the pension scheme to allow tax-efficient planning and to consider whether the nominated beneficiary (often a spouse) is appropriate in light of the new rules or whether it would be better for such benefits to pass to children, or more probably into a trust where the surviving spouse has access to funds if needed but otherwise, those assets sit outside of the survivor’s estate for IHT purposes.

If your estate is likely to become subject to IHT or face higher IHT liabilities, it may be worth exploring lifetime giving as a strategy. Lifetime gifts offer a range of opportunities to reduce the taxable value of your estate, each with its own advantages and considerations. Our Private Client team is here to guide you through these options and help you identify the best approach for your circumstances.

With the recent rule changes, the need for flexibility and ongoing planning is more critical than ever as people’s lives develop. Although there are many important reasons for almost everyone to have suitable Powers of Attorney in place, one is that it makes IHT planning by the appointed attorneys, in the event of a loss of capacity, much easier than it would otherwise be.

While the details of Powers of Attorney and lifetime giving are beyond the scope of this article, these considerations are crucial when reviewing your estate planning approach.