Lifetime Planning: Post-Budget Inheritance Tax Considerations

Whilst the Chancellor’s words of “This is not a budget we want to repeat” are still echoing, the outlook is bleak given a changing global economy largely based upon the machinations of a President across the pond.

Whilst the budget brought changes across the board this article specifically is looking at the Inheritance tax implications of the budget. Broadly the scope of IHT has been widened to encompass more assets. It of course is argued by the Government that these changes aim to address fiscal challenges facing the UK with wealthier estates contributing more equitably to public finances. Of course this inevitably drags more marginal estates into such taxable situations.

Whilst there was hope that the March Spring Statement might bring a reversal or softening of some of the proposed £40 billion in tax raising schemes there has been no such turning by the Chancellor and mutterings are already starting about what is to come in the budget in October 2025. Indeed the Bank of England and the Office of Budget Responsibility have halved the projected growth forecast for the UK as a result of the overall changes of the 2024 budget.

Key Points

IHT allowances for everyone have been frozen to 2030. Nothing unsurprising as the IHT personal allowance (the Nil Rate Band) has been £325,000 since 2008 and the Residential Allowance (the Residence Nil Rate Band) has been £175,000 since 2020.

Currently only 4% of UK deaths result in an IHT liability, however with inflation and value of property ever increasing the likelihood of more estates being caught in an Inheritance taxable bracket is expected to rise.

Similarly there will be more estates pushed to a point where tapering starts to apply on estates so that IHT allowances are lost (similar to the income tax personal allowance being tapered when income hits £100,000).

Unused Pension funds from defined contribution pensions, will also be included in the overall value of Estates from 6 April 2027. This will mean unused pensions and death benefits payable will aggregate with the rest of an estate (home, valuables, investments etc). Again this will likely push more people into an Inheritance taxable bracket.

Businesses and Farming have also been hit with sweeping changes to Agricultural Property Relief (APR) and Business Property Relief (BPR). Previously if a person died who was a business owner or farmer, the Government did not want the businesses or farms to fail as this would have a knock-on effect to the economy (employees losing jobs, supply chains interrupted etc). Therefore APR and BPR was a way to give qualifying businesses and farms up to 100% Inheritance tax relief.

The 100% Inheritance tax relief will, as of, 6 April 2026 will continue for the first £1,000,000 of combined agricultural and business property falling to 50% thereafter.

The other change has been the approach to taxation of foreign nationals living in the UK. Whilst the press label these people as the millionaires and billionaires living in the UK not all are and there are many people with property in multiple jurisdictions. As of 6 April 2025 the UK will shift from a domicile-based system to a residence-based system for determining IHT liability. Under the new rules individuals who have been UK residents for 10 of the last 20 tax years will be considered “long-term residents” and will be subject to IHT on their worldwide assets.

Conclusion

The changes of the October 2024 Budget represent a significant shift to the Inheritance tax landscape particularly for property owners.

With the freezing of IHT thresholds, reforms to APR and BPR, inclusion of pensions in IHT calculations and the transition to a residence-based system, individuals with property holdings should review their estate planning strategies.

Consulting with Thackray Williams in conjunction with accountants and other tax professionals will be crucial to navigate these changes effectively and ensure estates are structed to minimise potential IHT liabilities. Contact us on 020 8290 0440 for further information.