The 2024 Autumn Budget introduced significant reforms to Inheritance Tax (IHT), reshaping how wealth is transferred across generations. These changes are set to affect businesses, farmers, and individuals, particularly those with larger estates or family-run enterprises. Below, we break down the key reforms, explain their implications, and outline how you can prepare for these changes.
Key Inheritance Tax Changes
1. Freezing of IHT Thresholds
The nil-rate band (£325,000) and the residence nil-rate band (£175,000) have been frozen until April 2030. While this might seem like no change at first glance, it has significant implications due to “fiscal drag.” As property prices and asset values rise with inflation, more estates will breach the thresholds, increasing the number of people liable to pay Inheritance Tax.
2. Changes to Agricultural and Business Property Reliefs
Currently, Agricultural Property Relief (APR) and Business Property Relief (BPR) provide substantial relief to family-run farms and businesses by reducing the taxable value of qualifying assets. Under the existing rules:
- APR allows up to 100% relief on agricultural property that is actively used for farming, provided specific conditions are met.
- BPR provides up to 100% relief on business assets such as shares in unlisted companies, partnerships, and certain land or buildings used in a business.
However, starting in April 2026, the following changes will apply:
- Capping Relief at £1 Million: The first £1 million of qualifying agricultural or business assets will continue to receive 100% relief. For values exceeding this threshold, the relief will drop to 50%, resulting in an effective IHT rate of 20% on the surplus.
- Reduction in AIM Shares Relief: Investments in the Alternative Investment Market (AIM) will now qualify for only 50% relief instead of the previous 100%, impacting investors who relied on these shares as a tax-efficient way to transfer wealth.
3. Inclusion of Undrawn Pension Funds
Starting in April 2027, undrawn pension funds and death benefits will be included in the deceased’s estate for IHT purposes. This change will significantly increase the tax liabilities for estates that include pension savings.
Implications for Families and Businesses
These reforms represent a major shift in how wealth is taxed upon death, with wide-ranging consequences:
- Increased Tax Liabilities: Estates that previously escaped IHT may now fall within its scope, especially as thresholds remain frozen while asset values rise.
- Impact on Family Farms and Businesses: The capping of reliefs could force some families to sell portions of their businesses or farms to meet tax liabilities.
- Financial Planning Challenges: Individuals will need to revisit their estate planning strategies, taking into account the new inclusion of pension funds and reduced reliefs.
What Can You Do?
To mitigate the impact of these changes, proactive planning is essential. Here’s how you can prepare:
1. Review Your Estate Plan
With the new rules coming into effect in stages, now is the time to review your estate plan. Consider gifting assets during your lifetime to reduce the value of your taxable estate.
2. Assess Business and Farm Structures
If you own agricultural or business assets, consult with a tax advisor at SMH Group to explore restructuring options that maximise available reliefs.
3. Re-evaluate Pension Plans
With pensions now subject to IHT, it’s vital to review how undrawn pension funds factor into your estate.
For more advice on the IHT reforms, contact us on 0114 266 4432 or email info@smh.group.
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