How do the changes to inheritance tax impact you?
In the Autumn Budget of October 2024, Chancellor Rachel Reeves announced substantial reforms to the UK’s inheritance tax (IHT) laws. To summarise, these changes are designed to increase revenue from wealthier estates. Consequently, the changes to IHT could push more individuals into the taxable bracket, especially if property values continue to rise.
This overview of the changes to IHT in the Budget 2024 highlights the major adjustments announced, focusing on the extended threshold freeze, new rules for pension funds, and limitations on agricultural and business property reliefs. Furthermore, we touch on the adjustments to tax relief on AIM shares.
Feeling concerned about the changes to IHT?
Read this article to understand how the new rules might affect you and discover the various ways to protect your estate.
Key article takeaways
- The main changes to IHT announced in the Budget
- How the IHT threshold freeze could impact estates and beneficiaries
- What the inclusion of pension pots mean for wealth transfer
- Why agricultural relief is now capped at £1 million
- The implications of adjustments to AIM shares relief for investors and estates
- Strategies to navigate these changes, including gifting and trust planning
- The importance of seeking professional IHT advice to manage taxes
Related reading: Do I need an inheritance tax adviser
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The key changes to IHT in this year’s Budget
Let’s take a look at the announcements covering the:
- Extension of the IHT threshold freeze
- Inclusion of pension pots in IHT calculations
- Capping agricultural and business property reliefs
- Adjustments to AIM shares relief
In the following sections, we summarise these changes, offer insight into how they may affect you, and offer some factors to consider in each of these areas.
1. Extension of the IHT threshold freeze
The inheritance tax nil-rate band, which has been set at £325,000 since 2009, will remain frozen until 2030. This freeze effectively means that as property values and asset prices increase, more estates will fall within the scope of inheritance tax.
Given inflation and rising property prices, freezing the threshold could lead to a larger tax burden on estates that were previously unaffected by IHT. One of the ways you could reduce the potential impact of these changes is by gifting property to your children to avoid IHT. Of course, there are many considerations and this isn’t a one-size-fits-all approach, so consult a specialist IHT adviser before making any decisions.
Learn more: Inheritance tax threshold freeze until 2030
2. Inclusion of pension pots in IHT calculations
Starting in April 2027, pension funds inherited by beneficiaries will be considered part of the deceased’s estate for IHT purposes. Previously, pension pots could be passed on to beneficiaries tax-free, making them a favoured tool for wealth transfer.
This change aims to align pensions with other forms of inheritance, increasing potential tax liabilities on larger estates.
For high-net-worth individuals, this adjustment means that pensions, once a tax-free shelter for wealth, will now be subject to inheritance tax, impacting the financial planning strategies of those who wish to pass on substantial assets.
If this announcement has left you feeling a little stranded as you were banking on using your pension to mitigate this tax, we’d recommend learning about the other ways to avoid IHT.
Learn more: Pensions and inheritance tax changes in the Budget
3. Capping agricultural and business property reliefs
Effective April 2026, agricultural and business property reliefs for inheritance tax will be capped at £1 million combined. Traditionally, these reliefs have provided significant tax advantages, particularly for family-owned farms and businesses.
By capping the relief at £1 million, the government aims to restrict these benefits for larger estates while still supporting smaller family farms and businesses.
For wealthier individuals, this change means that only a limited portion of their agricultural and business assets will be exempt from inheritance tax, potentially increasing their IHT liability.
Learn more: Budget 2024: Changes to business property & agricultural relief
4. Adjustments to AIM shares relief
Investments in the Alternative Investment Market (AIM) have traditionally qualified for business property relief, making them exempt from IHT if held for more than two years.
The Budget 2024 introduces a combined threshold of £1 million for business and agricultural property reliefs, ensuring that AIM shares, along with other business assets, face some IHT exposure.
AIM shares, often held for high-growth potential, will now be subject to a partial IHT rate of 20%, with a 50% relief available. This change could shift the appeal of AIM shares for high-net-worth investors, who have previously relied on them for IHT savings.
How could the changes to IHT impact you and your wealth?
Here’s an overview of how the changes to IHT in the Budget could affect you and your money.
Increased tax liability for wealthier estates
The prolonged freeze on the nil-rate band threshold, along with the inclusion of pension funds and the capping of reliefs, will increase the tax burden on larger estates. These changes are designed to raise additional revenue, particularly from high-net-worth individuals and estates with significant assets.
Related reading: Seven ways to preserve your wealth, property and assets.
1. Opportunities for lifetime gifting
The new restrictions on property reliefs and the inclusion of pension pots in IHT calculations may lead individuals to consider making more lifetime gifts to reduce the taxable value of their estate.
For example, a business owner might transfer shares to family members during their lifetime, removing that value from the estate. Similarly, gifting farmland to children at an earlier stage could help reduce the estate’s taxable value.
However, this approach requires careful planning and consideration of potential tax implications, as gifts within seven years of death remain subject to IHT under the sliding scale of taper relief.
2. Impact on family businesses and farms
The capping of agricultural and business property reliefs at £1 million could have significant implications for family-owned farms and businesses, especially those that exceed this threshold.
For such families, the revised limits may mean that a portion of their business or agricultural assets will be subject to IHT, potentially requiring them to re-evaluate their estate planning strategies.
3. Increased complexity
The reforms, particularly the inclusion of pension pots in inheritance tax calculations and the new caps on reliefs will introduce additional complexities in estate planning and administration.
Executors will now need formal valuations for pension funds, business assets, and agricultural properties, potentially increasing the administrative burden on both executors and HMRC. This added complexity may lead some individuals to seek professional advice to navigate the changing IHT landscape effectively.
4. Tax planning for high-net-worth individuals
For wealthier individuals who have previously used pensions, business property, and AIM shares to limit inheritance tax exposure, the new rules signal a need to re-evaluate tax planning strategies. With pensions now part of IHT calculations and the reduced reliefs on business and agricultural assets, alternative strategies may be necessary to mitigate IHT liabilities effectively.
5. Using trusts to reduce or avoid inheritance tax
Setting up a trust to avoid inheritance tax is a powerful tool for protecting your assets. Trusts allow you to transfer high-value items, such as property or investments, out of your taxable estate while maintaining control over their distribution.
For example, a trust can provide for future generations while reducing tax exposure. Properly structured, trusts ensure beneficiaries receive assets efficiently, offering both financial security and significant inheritance tax savings.
Budget 2024: Changes to inheritance tax – summary
These reforms to inheritance tax mark a significant shift in the UK’s approach to taxing wealth transfers. By freezing thresholds, expanding the scope of taxable assets, and limiting reliefs on specific asset classes, the government aims to increase tax revenue while targeting wealthier estates.
For individuals affected by these changes, proactive estate planning will be essential to work through the new rules effectively.
Seeking professional guidance can help ensure that your estate is structured in the most tax-efficient manner possible, taking full advantage of any remaining reliefs and allowances under the revised IHT framework.
Lastly, for families and high-net-worth individuals, these reforms highlight the importance of regularly reviewing estate plans and staying informed of changes to inheritance tax laws. As the tax landscape continues to evolve, adapting strategies to align with the latest rules will be key to preserving wealth and ensuring a smooth transition of assets to future generations.
Related reading: What does an estate planner do?
Factors to consider
Here’s some further insight into the changes to IHT in this year’s Budget.
1. The current value of your estate
Assess your estate’s total value, including properties, savings, investments, and pensions. With the IHT threshold frozen, any increase in asset values could push your estate over the taxable limit, potentially impacting your beneficiaries.
2. Rising property and asset values
As property and asset prices rise, estates that would have fallen under the IHT threshold may now exceed it. Consider the potential future growth of your estate and how this could increase the inheritance tax burden.
3. The impact of including pensions in IHT
With pensions now part of IHT calculations from 2027, any significant pension wealth will contribute to the estate’s taxable value. Review how these new rules may affect the overall tax your estate will incur.
4. The effect of capping business and agricultural reliefs
If your estate includes high-value business or agricultural assets, only the first £1 million will now be exempt from IHT. Consider restructuring these assets or setting up trusts to manage the tax impact effectively.
5. Your family’s financial goals and needs
Think about your family’s goals, such as maintaining a business, funding education, or ensuring you have enough money to retire on. Align your estate planning with these goals to ensure your estate supports your family in the way you intend.
6. Lifetime gifting opportunities
Gifts given seven years before death are IHT-free, so lifetime gifting can reduce your estate’s value over time. Evaluate how making strategic gifts to family or friends might reduce the future tax burden on your estate. Get clear on the seven-year rule and how it could apply to you
7. Annual gift allowances
Use the annual IHT-free gift allowance of £3,000 per person. Making regular, small gifts can gradually lower your estate’s value, offering a tax-efficient way to transfer wealth to loved ones over time.
8. Trust structures for high-value assets
Trusts can keep high-value assets outside of your taxable estate, benefiting your beneficiaries. Consider using trusts for assets such as a second property or valuable investments, ensuring these pass on with minimal tax.
9. Business restructuring for family-owned businesses
Family businesses may need restructuring to retain IHT exemptions under the new relief caps. Explore options like transferring shares or placing parts of the business in trusts to stay within the exemption limit.
These factors will help you navigate the changes in the 2024 Budget and protect your estate’s value for your family.
Seeking professional IHT advice
Inheritance tax laws are complex, and the 2024 changes add further intricacies. Consulting a specialist can provide tailored strategies, from structuring trusts to maximizing reliefs, ensuring your estate plan remains efficient and compliant. For many the power of specialist IHT planning advice is now crucial to preserve their family’s wealth.
Article FAQs – recap on the key changes
Keen to learn more about the impact of the changes to IHT in the Budget 2024?
Read through this section to further your knowledge.
What effect could the IHT threshold freeze have on my estate?
The threshold freeze at £325,000 until 2030 means that, as assets grow in value, more estates may be subject to inheritance tax. For example, if property values rise, estates that previously fell below the threshold may now exceed it, resulting in higher taxes for beneficiaries.
When will pension funds become subject to IHT?
Starting in April 2027, inherited pensions will be part of an estate’s taxable assets for IHT purposes. This means that if you pass on a pension, its value will be added to the estate total. For example, a £200,000 pension could increase the tax owed by your heirs.
Is it still possible to reduce inheritance tax on business assets?
Yes, but new caps limit how much relief applies to business assets. Only the first £1 million in business assets will be exempt from IHT, with any value above that subject to tax. For example, a business estate worth £1.5 million could face IHT of £500,000. These figures are here for guidance and of course, always seek advice to understand your true position.
Are AIM shares still exempt from IHT?
AIM shares are only partially exempt under the new rules. While the first £1 million is exempt, holdings above that amount will incur a 20% tax rate on any excess value. For example, an AIM portfolio worth £1.2 million would see £200,000 taxed at this rate.
What are the updated rules for agricultural relief?
Agricultural properties and farms now have a relief cap of £1 million. Estates with agricultural assets exceeding this limit will face IHT on the excess. For instance, if a farm is valued at £2 million, only the first £1 million would be exempt, with tax applied to the remainder.
Can placing assets in trusts help reduce IHT?
Yes, trusts are effective for reducing IHT because they remove assets from your estate. For example, by placing property or investments in a trust, those assets are no longer part of the taxable estate, allowing you to retain control while reducing tax for heirs.
Is it still possible to make IHT-free annual gifts?
Yes, you can gift up to £3,000 per year tax-free. For example, if you give £3,000 to each of two family members every year, this helps lower the estate’s value and reduces IHT. Regular small gifts are an easy way to decrease your estate over time.
External resources
Please find below some additional articles covering the changes to IHT in this year’s Budget.
Inheritance tax rises and the Budget: who’s affected? (Institute of Fiscal Studies)
Budget 2024: Inheritance tax and family farms (House of Lords)
What are the changes to agricultural property relief? (GOV.UK)
Pensions subject to Inheritance Tax from April 2027 (Money Saving Expert)
