One of the biggest announcements in the Autumn Budget was in relation to Inheritance tax, the key changes are:
- Any unused pension pots will be subject to Inheritance Tax on deaths from 6 April 2027.
- Business Property Relief (BPR) and Agricultural Property Relief (APR) at 100% will be capped at a combined £1million for both reliefs, after which the rate of relief will be 50% from 6 April 2026.
- It has been confirmed that Agricultural Property Relief will be extend to land managed under an environmental agreement from 6 April 2025.
- AIM shares and shares designated as “not listed” on the markets of recognised stock exchanges will only be entitled to relief 50%, and the £1million 100% relief will not apply to them from 6 April 2026.
- From April 2025 the non-domicile tax regime is to be abolished, this impacts Inheritance Tax as when you are UK domiciled you pay tax on your worldwide assets whereas if you are non-domiciled, you only pay UK inheritance tax on your UK assets.
Pensions
The government will run a consultation for 12 weeks between 30 October 2024 and 22 January 2025 on the changes announced in relation to pensions.
The government have stated that the main driver behind this is that pension schemes are increasingly being used as an Inheritance tax planning tool to hold funds outside of an estate where there is no intention to use the funds in retirement.
What we do know:
- Scheme administrators will be responsible for reporting and paying any IHT due.
- Pension funds passing to spouses or civil partners will still be exempt due to spousal exemption, it is understood that this will apply where there is a letter of wishes expressing that an individual would like their pension fund to pass to their spouse/civil partner
- Where an individual dies who is aged above 75, income tax will also apply to any lump sum or pension benefits that are paid to a nominated beneficiary as well as the value forming part of their estate and being subject to IHT. This is best shown with an example:
Andy dies age 80 with a pension fund of £500,000 the rest of his Estate is valued at £1,000,000. Andy had a letter of wishes expressing that he would like his pension to be paid to his grandchildren. The pension scheme administrations chose to follow his wishes.
Current Position – Andy’s Estate is £1,000,000 and assuming he qualifies for the nil rate band and residence nil rate band of £325,000 and £175,000 respectively his estate would have a liability of £200,000. The pension fund does not form part of his estate.
Income tax will be due on any lump sum or pension paid to Andy’s grandchildren at their marginal rate of tax when payments are made.
Proposed position from 6 April 2027 – The pension fund will now be included in Andy’s Estate, and therefore his total estate for IHT purposes is £1,500,000. The IHT payable will be £400,000 this is an effective rate on the total estate of 26.667%.
Andy’s executors will be responsible for paying £266,667 on the none pension assets, and the pension administrators will be responsible for paying £133,333 (26.667% of £500,000 of pension pot value).
The remaining pension pot after IHT of £366,667 will be taxed at the beneficiary’s marginal rate of tax. So, if a £30,000 payment is to a basic rate taxpayer they will pay 20% tax of £6,000 on this.
Summary – The new IHT rules mean an extra £200,000 IHT liability.
£1million cap on APR and BPR
A new cap will be introduced on the 100% relief for APR and BPR of £1million. Where the total APR and BPR assets exceed this the rate will fall to 50%. Again, this is easiest explained with an example.
Beatrice has non-APR and non-BPR assets worth £500,000. She also owns agricultural land valued at £1.5million and her own personal trading company valued at £2million.
As her Estate is in excess of the Residence Nil Rate Band threshold the executors will not be able to claim this, the Estate will only benefit from the £325,000 Nil Rate Band.
Current Position – Beatrice’s executors would have been able to claim £1.5million of APR and £2million BPR meaning that the taxable estate after deducting the nil rate band would have been £175,000 giving an inheritance tax liability of £70,000.
Position from 6 April 2026 – Beatrice’s executors will only be able to claim £1,000,000 relief at 100%. This means that £2.5million will only qualify for relief at 50%. The taxable estate after deducting the nil rate band and the 100% relief of £1million and then 50% would be £1,425,000 giving an inheritance tax liability of £570,000. This is in excess of her non-APR assets and non-BPR assets and therefore will need funded out of the agricultural land and/or shares.
Summary – The new IHT rules mean an extra £500,000 IHT liability.
Extension of APR
The one positive in relation to APR is that it now includes land manged under environmental agreements with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or relevant approved responsible bodies. This means that it will be able to benefit from APR from 6 April 2025 but will be subject to the £1million cap from 6 April 2026.
AIM Shares
These had previously qualified for 100% relief if you had owned the shares for 2 years, they will now only qualify for relief at 50%. This will not impact the £1million cap.
Domicile and Inheritance Tax
From April 2025, the concept of domicile will be removed from tax legislation for inheritance tax purposes this means that a person will be subject to UK inheritance tax on their worldwide assets when they have been resident in the UK for at least 10 out of the previous 20 tax years.
Impact of the above measures on Trusts
Certain trusts (mainly discretionary trusts or interest in possession trusts created in lifetime since 2006) pay inheritance tax every 10 years and also when property leaves the trust and passes to a beneficiary.
Trusts that had held APR and BPR assets for the required length of time and met all qualifying conditions qualified for 100% relief. Meaning that if you had a trust that held company shares in a family trading company, then no IHT would be payable.
From 6 April 2026, the trustees will only be able to claim a combined £1million allowance at each ten-year anniversary or when assets leave the trust. This could be quite difficult for a lot of trusts as they are generally holding illiquid assets like company shares and they will have a liability to pay every 10 years.
Many individuals may have set up more than 1 trust, for trusts created before 30 October 2024 each trust will benefit from £1million allowance for 100% relief per trust.
However, the government intend to introduce rules that will mean any trust created from 30 October 2024 will have this £1million allowance divided between the trusts where they are created by the same settlor.
The detail around trusts is limited, and a technical consultation is to be published in early 2025 on the detailed application of the impact on trusts.
Impact of the above measures on lifetime gifting
Anti Forestalling measures will also be introduced meaning the new rules on the £1million cap will also apply to gifts made on or after 30 October 2024.
So, if someone gifted £2million of Agricultural land to their child today and the parent making the gift dies within 7 years but after 6 April 2026. The gift would only qualify for £1million of 100% relief with the rest being relieved at 50% only.
If you have any questions on the above, please contact alex.dent@saint.co.uk
