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Understanding Inheritance Tax: What the Autumn Budget 2024 Means for You (and How to Plan for It)

AndyThompson

Written by: Andy Thompson on 3rd February 2025

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Inheritance Tax (IHT) is a concern for many families in the UK, especially as the government announced significant changes in the Autumn Budget 2024. These changes could increase the number of people affected by IHT, but with careful planning, you can take steps to reduce the tax your loved ones will have to pay. This blog will explain the new rules and outline practical ways to manage your estate.

What is Inheritance Tax (IHT)?

IHT is a tax on the value of a person’s estate (property, money, and possessions) when they pass away.

  • Current Tax-Free Thresholds: The first £325,000 of your estate is tax-free (the “nil-rate band”). If your estate includes a home passed to direct descendants, you can add an extra £175,000 (the “residence nil-rate band”).
  • Anything Over the Threshold: Taxed at 40%. 

What Changed in the Autumn Budget 2024?

The government introduced key reforms to increase IHT revenue, particularly targeting wealthier estates and pensions. Here are the highlights:

1. Thresholds Frozen Until 2030

The £325,000 nil-rate band and £175,000 residence allowance will remain unchanged until April 2030.

  • Impact: As property prices and inflation rise, more estates exceed these thresholds, resulting in higher tax bills.

2. Agricultural and Business Property Relief (APR and BPR) Adjustments

From April 2026, only the first £1 million of agricultural or business property will qualify for 100% relief. Anything above this will be taxed at 20%.

  • Impact: Family farms and businesses could face a higher tax burden, forcing some to sell assets to cover the tax bill.

3. Pensions Included in IHT

From April 2027, unused pension pots will be included in your estate for IHT purposes. Pension providers will handle the reporting and payment of tax.

  • Impact: Heirs may face unexpected tax liabilities if large pensions are left untouched.
     

How the Changes Affect Business Property Relief (BPR): An Example

Before the Autumn Budget Changes

Imagine Sarah owns a family-run manufacturing business worth £2.5 million. Under the previous rules:

  • The entire business qualified for 100% Business Property Relief (BPR), making it completely exempt from IHT.
  • Sarah’s children could inherit the business without any IHT liability.

After the Autumn Budget Changes

From April 2026:

  • Only the first £1 million of the business value qualifies for 100% BPR.
  • The remaining £1.5 million will be taxed at a reduced rate of 20% (instead of the standard 40%).

Here’s the calculation:

  • First £1 million: No tax (100% relief).
  • Remaining £1.5 million: 20% tax = £300,000 IHT liability.

Impact on Sarah’s Family:

The £300,000 IHT bill could force Sarah’s children to sell shares in the business or take on debt to pay the tax.

This change disproportionately affects family-run businesses with high values, as they may lack liquid assets to cover tax liabilities.

Tax Planning Opportunities

While these changes may increase the scope of IHT, there are several ways to plan ahead and reduce the tax burden on your estate:

1. Make Use of Lifetime Gifts

Gifts made during your lifetime can fall outside of your estate for IHT if you survive for seven years after giving them. This is known as the 7-Year Rule.

  •  You can also use the annual gift allowance of £3,000 per year (per person) tax-free, as well as small gifts of up to £250 to unlimited individuals.

2. Charitable Donations

Leaving money to a registered charity reduces your taxable estate and can lower your IHT rate from 40% to 36% if you leave at least 10% of your estate to charity.

3. Use Trusts

Trusts can help manage your estate and reduce IHT liabilities by holding assets outside of your estate. Popular options include discretionary trusts, which allow flexibility for beneficiaries.

  • Example: Grandparents may set up a trust to fund grandchildren’s education, removing those funds from their estate.

4. Consider Pensions as a Planning Tool

Even though pensions will be included in IHT from 2027, they remain a tax-efficient way to save and pass on wealth.

  • Strategy: Use other savings to cover living costs during retirement, preserving pension funds for inheritance.

5. Invest in Exempt Assets

Certain investments qualify for Business Relief (e.g., shares in qualifying businesses). These assets may be eligible for 50% or 100% relief if held for at least two years.

6. Insure Against IHT

You can take out a whole-of-life insurance policy written in trust to cover the expected IHT liability. The payout from the policy goes directly to your beneficiaries and isn’t subject to IHT.

Take Action Today

If you’re concerned about how the Autumn Budget changes will affect your estate, there are practical steps you can take to reduce the impact of IHT: ????️

1. Consult a Tax Adviser or Financial Planner

  • Tax advisers can help you explore personalised strategies, such as structuring your estate to minimise liabilities or using available exemptions.

2. Plan for Trusts

  • Setting up trusts can be a highly effective way to reduce the taxable value of your estate while ensuring your assets are managed for future generations.

3. Consider Lifetime Gifts

  • Use the 7-Year Rule and gifting allowances to transfer wealth during your lifetime. Gifting significant assets early can dramatically reduce your estate’s IHT liability.

4. Review Your Will

  • Ensure your will reflects the latest rules and allows you to save on IHT. An adequately structured will can make a big difference for your beneficiaries.

5. Use Financial Products Like Insurance

  • Whole-of-life insurance policies written in trust can help cover any IHT liability, leaving more of your estate intact for your family.

6. Take Advantage of Business or Agricultural Relief

  • If you own a business or farm, work with an adviser to understand how the new BPR and APR caps affect you and explore solutions like restructuring or selling non-core assets.

7. Reassess Your Pensions

  • With pensions becoming subject to IHT, it’s essential to review how these funds fit into your overall estate plan and consider drawing down pensions strategically. 

Final Thoughts

While the Autumn Budget 2024 introduces new challenges, it also highlights the importance of proactive estate planning. By taking advantage of exemptions, reliefs, and strategies like gifting or trusts, you can reduce your estate’s tax liability and ensure more of your wealth goes to your loved ones. 

Don’t wait until it’s too late—consult a tax adviser, review your plans, and start taking steps today to secure your family’s financial future. 

For more information, contact Clearcut Accounting at [email protected]

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