It is often said that inheritance tax (IHT) can be prevented, reduced or eliminated with the right tax planning in place. While this may still be the case for some people, the 2024 Autumn Budget and 2025 Spring Statement has certainly made changes to the existing rules that will no doubt aim to limit this.
Many people believe that IHT is a tax payable only by those who are perceived to be wealthy, but as property prices continue to soar, more and more people are finding themselves coming within the scope of IHT each year.
It goes without saying that IHT is a very technical and often complex area of tax, and it would be impossible to cover all aspects here, so this article aims to look at some basic outlines, what the latest changes are and why these could be important for you and your family.
What is IHT
In very basic terms, IHT is a form of wealth tax, and while it can sometime become payable during a lifetime if assets are transferred, it is most often payable when someone dies - the main rate of IHT is 40%, although the lifetime rate is 20% where applicable. The location of the assets can also be important if you are not domiciled in the UK (see below for more on what this is), as the IHT rules seek to charge IHT on your worldwide assets if you are UK domiciled. If you are not UK domiciled, only your UK based assets will be subject to IHT. The term ‘assets’ can cover a wide variety of situations, but will include property, shares, bank balances, cash, cars, jewellery and so on.
Some assets may be exempt, but in addition there are valuable reliefs available for those who hold business or agricultural assets, which would allow these to be transferred with no IHT consequences. This was reliant on certain conditions being met, specifically in the two years prior to the transfer.
Gifts made during lifetime can be subject to IHT however there are a number of annual exemptions that will typically cover most smaller gifts in a number of situations. If larger gifts are made, each person is entitled to an IHT nil rate band (NRB) of £325,000 that is deducted from the value of the lifetime transfer, or on death, from the value of their estate. There is also a secondary residential NRB of £175,000 to help with the value of your home if this is included in your estate. If these are not used in the seven years prior to death, they will be available to minimise any IHT cost on death, so it is important to record when value is gifted or transferred from one person to another, either during their lifetime or on death.
If a couple are married or in a registered civil partnership, on the first death, all assets passed to the surviving partner do so free of IHT, and any remaining NBR and RNRB are also transferred.
What has changed
The main changes to IHT in the 2024 Budget revolve around three main areas:
Business Property Relief (BPR)/Agricultural Property Relief (APR)
Previously, if a trading business or one involved in agriculture was owned at death, it could be passed on free from IHT, by claiming the 100% BPR or APR that would be available, effectively taking such assets outside of the IHT charge. It has been announced that from 6 April 2026, the 100% reliefs will be restricted to the first £1 million, with 50% relief being given on any excess. This means that any value above £1 million will be subject to a deemed IHT charge of 20%, where there was no IHT cost previously. The new 50% relief rule also apply to AIM listed shares, which previously enjoyed 100% relief.
Pensions
Previously, undrawn pension pots were not included as assets when arriving at the value of an estate on death for IHT purposes. From 6 April 2027, this will no longer be the case, and the value of pension savings will need to be accounted for from then on. This will mean where tax planning work has been done in the past and excluded pensions, it may need to be revisited as there will be a higher estate value for IHT purposes in the future.
Domicile
Previously, the concept of domicile was widely drawn and therefore potentially open to abuse, as being not UK domiciled could remove your overseas assets from the IHT net. There were numerous outcomes from different scenarios, but primarily, if your father was born in the UK, and you continued to live in the UK, it is likely you would have been a UK domicile. This could be changed over time, but such change was not always straight forward to establish. From 6 April 2025, domicile will be based on your residence position (using the Statutory Residence Test), and if you are found to be UK resident in ten out of the last twenty years, you will be treated as UK domicile.
What about the future
Before the 2024 Budget and 2025 Spring Statement, there was speculation that various aspects of IHT could change. Our top 5 list of things that didn’t happen looks like this:
-
Alter the level of the nil rate bands
-
Increase the two year/seven year thresholds
-
Increase the IHT rate
-
Abolish BPR and APR
-
Reduce or limit other reliefs and exemptions
None of the above have been brought in yet, but no-one can rule out future changes to the IHT landscape.
What to do now
Some of the announcements on IHT were expected, but were not perhaps as bad as some may have thought. The pension change means that those who have saved all their lives may now find there is an IHT cost if nothing is done with their pension, and may wish to seek appropriate financial advice.
While the BPR/APR changes will have an impact too, there is scope with some careful planning to ensure that spouses can jointly benefit from £2 million being exempt, which is likely to be more than sufficient to cover the value held at death by many business owners and farmers. As the background to IHT has not altered, but the domicile rules have changed, it will be important for individuals who may live in the UK but are not directly based here to review their IHT position and their plans for the future.
Here to help
If you are concerned about your potential IHT position, whether due to the Budget changes or for other reasons, we can review your overall position. By doing so, we can provide advice on what action to take to help mitigate or reduce the likely IHT exposure facing you or your family. Why not get in touch with our experts.
