Written by: Andy Thompson on 3rd February 2025
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.
IHT is a tax on the value of a person’s estate (property, money, and possessions) when they pass away.
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.
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%.
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.
Before the Autumn Budget Changes
Imagine Sarah owns a family-run manufacturing business worth £2.5 million. Under the previous rules:
After the Autumn Budget Changes
From April 2026:
Here’s the calculation:
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.
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.
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.
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.
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.
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
2. Plan for Trusts
3. Consider Lifetime Gifts
4. Review Your Will
5. Use Financial Products Like Insurance
6. Take Advantage of Business or Agricultural Relief
7. Reassess Your Pensions
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]
Written by: Andy Thompson on 3rd February 2025