What the New Budget Means for Inheritance Tax

Before yesterday’s budget there was a great deal of speculation as to what changes would be made to the inheritance tax regime. Although relatively few estates actually end up paying inheritance tax it is often viewed very negatively. The argument is that you pay taxes on your earnings, you pay tax on your pensions and then you pay inheritance tax “again” on your estate when you pass away. Three bites of the cherry if you will, and that’s before anyone has even mentioned having to pay their own care home fees.

Inheritance Tax Rates and Allowances

Previously, inheritance tax was charged at 40% on all of person’s property, possessions and money over a threshold of £325,000. Even if your estate was worth more than £325,000 you would only pay inheritance tax on the amount above this threshold. There was additional allowance of £175,000 when you left your home, or the proceeds of sale, directly to your children or grandchildren. This meant an individual’s inheritance tax allowance was up to £500,000.

Where a person left their entire estate to their spouse, or civil partner, there was, usually, no inheritance tax to pay and the survivor’s estate could then claim their deceased partner’s inheritance tax allowances, so the inheritance tax allowance, on second death, was at £1,000,000.  Breathing a slight sigh of relief, these allowances remain in place and are now fixed until 2030. I say only a slight sigh of relief as the rules around the additional £175,000 allowance are complicated, and it can take some explaining when trying to claim the additional allowance.

In addition to the inheritance tax allowances remaining fixed there were no changes to the following:

1. Lifetime gifting allowances
2. Gifts to charity during your lifetime and in your will
3. Lifetime gifts into trust

Key Changes in Business and Agricultural Property Relief

The main changes to the inheritance tax regime focused on the exemptions to inheritance tax for business property relief and agricultural property relief, although the scope of the reliefs has remained the same.  

Business Property Relief apples to the ownership of a business, an interest in a business or shares in an unlisted company. There are two rates of Business Property Relief being 100% or 50%. You only get Business Property Relief if you have owned the business, or asset in the business, for at least two years before your death.

Agricultural Property Relief is available on agricultural property (think working farms) and land. The relief is 100%. The changes to the inheritance tax regime now mean that the 100% relief currently available on qualifying business and agricultural assets will continue for the first £1,000,000 of combined assets but will be 50% thereafter. Also, the rate of Business Property Relief available for shares designated as “not listed” on markets of recognised stock exchanges, such as the AIM market, will be reduced from 100% to 50%.  Assets automatically receiving 50% relief will not use up the allowance and any unused allowance will not be transferable between spouses or civil partners. These changes will take effect from 6 April 2026.

Implications of Pensions Becoming Liable to Inheritance Tax

The other change, and perhaps the more controversial one in time, is the Government’s plan to make pensions liable to inheritance tax. The Government is arguing that pension schemes have, historically, been used as tax planning tools to transfer wealth without an inheritance tax charge, rather than for their intended purpose of funding retirement. Some pension funds, which are non-discretionary, are treated as part of an individuals’ estate for inheritance tax purposes, but discretionary ones (where the pension trustees decide to whom the pension benefit is paid) are not. Most UK pension schemes are discretionary and not liable to inheritance tax.

From the 6^th April 2027 most unused pension funds, and death benefits, including those in discretionary pension funds, will be included within the value of a person’s estate for inheritance tax purposes. The current distinction in treatment between discretionary and non-discretionary schemes will be removed and the changes will apply to both defined contribution and defined benefit schemes. Arguably, if you are leaving your estate to your surviving spouse or civil partner and have nominated with your pension provider that they would receive any pension benefit payable on your death, the inheritance tax position hasn’t significantly changed, but there is a sense that these changes will be much more far reaching than initially anticipated.

How Pinney Talfourd can help

For more advice on the recent budget changes, please contact our private client team who specialise in will drafting, inheritance tax planning, trusts, administering estate and Court of Protection work.