It was hugely anticipated that the new Labour government would seek to make significant changes to the current Inheritance Tax regime in this year’s Autumn Budget.
The changes were not as far reaching as some commentators predicted, however there are several key changes which are worth making note of, particularly if these are likely to affect your long-term estate planning objectives.
Nil Rate Band & Residence Nil Rate Band – Frozen until 2030
One thing that will remain the same is the current Nil Rate Band allowance which the Chancellor, Rachel Reeves, announced will be frozen until at least 2030.
Additionally, the Residence Nil Rate Band, which is an allowance which relates to your residential property and can be claimed on an estate if certain conditions are satisfied, will also be frozen until at least 2030.
The previous Conservative government froze these allowances at £325,000 and £175,000 respectively until April 2028, so we were not expecting any changes until at least then anyway.
To many who were worried that the allowances would be reduced, or worse, done away with completely, this will come with a sigh of relief.
However, for those individuals with assets over the £1million maximum allowances, this will be disappointing to hear – particularly given the steady rise in property values over the last 20 years or so, and given that the Nil Rate Band has remained unchanged since the previous increase in the 2008/2009 tax year under Gordon Brown’s Labour government.
As the values of assets rise with inflation, there will be gradual increases to the value of estates. By not increasing the allowances in line with inflation and/or property prices, there is likely to be an increase in the amount of estates that must pay Inheritance Tax.
Pensions set to be subject to Inheritance Tax – 2-year warning
The biggest and perhaps most controversial change is the decision to bring pensions into Inheritance Tax from April 2027.
The Chancellor described this as ‘closing a loophole’ that was created by the previous government. Pensions are seen as a highly useful tool for estate planning purposes as they have so far remained outside of the Inheritance Tax legislation.
For many people who chose to transfer their savings into their pension pot, to take advantage of this exemption, they will now need to consider whether to move their retirement savings elsewhere.
Business Relief – Changes from April 2025
Finally, we now know there will be changes coming to both the Business Property and Agricultural Property Inheritance Tax reliefs.
This is expected to affect business owners and owners of agricultural property.
Following these changes:
- The first £1million of qualifying business and agricultural assets will be free of tax
- The balance above £1million on qualifying business and agricultural assets will attract a 50% tax relief and will be subject to tax at 40% (essentially a 20% tax charge)
- AIM (Alternative Investment Market) shares which qualify for Business Relief will attract a 50% tax relief and will be subject to tax at 40% (essentially a 20% tax charge) – i.e., as above but without the initial £1million tax-free element.
The changes will take effect from the start of the new tax year 2025/2026, leaving little time for those affected to plan accordingly.
Summary
Going forward, it is clear that many people who would have otherwise been under the thresholds may now have to pay Inheritance Tax.
In justifying the reasoning for the changes, the Chancellor said she estimated that only 6% of estates in the current 2024/25 tax year would be subject to Inheritance Tax. This figure puts into context the current number of estates that pay Inheritance Tax at present; however this is surely now set to rise following the changes.
The changes set to effect pensions is likely to have the biggest impact, and for a significant number of people who have so far relied on this efficient method of inheritance tax planning, they will now have to reconsider their estate planning strategy.
The key takeaway from the announcement is to make sure you and your family have planned ahead, by taking the appropriate estate planning advice and acting accordingly. This will allow you to be fully informed on the changes and the options available to you –and ensure all available allowances and reliefs can be claimed.
By doing nothing, this may result in your estate paying a tax bill which you were not expecting before the changes.
If you have any queries regarding the above, our Private Wealth & Succession team would be very happy to help. Please email or call us today on 0113 207 0000.
*Blacks Solicitors does not provide financial advice and the content of this blog post is for informational purposes only.
