In light of the the recent changes to IHT exemptions and other reliefs announced in Labour’s budget we examine how this may affect your financial plan…
Reviewing your IHT Situation – What You Need to Know
As we digest the changes within Labour’s budget, many are beginning to revisit their financial plans in light of their long-term goals. The changes, aimed at investing in public services and addressing a UK debt pile, include significant reforms to Inheritance Tax (IHT) Agricultural Property Relief (APR) and Business Property Relief (BPR). These changes could now see many more estates re-evaluating their financial strategies to minimise tax exposure.
This blog outlines the key changes to IHT and provides guidance for minimising your tax burden while maximising your savings. Since every financial situation is unique, it’s more important than ever to seek professional advice to be well-prepared to achieve your financial goals.
Key Changes affecting IHT
- Thresholds Frozen Until 2030
- IHT on Inherited Pensions (Effective from 2027)
- Changes to APR and BPR
- Abolition of Non-Domicile Status (Effective from 2025)
To read the full report – Autumn Budget 2024 – GOV.UK
Read our takeaways from the budget here.
Thresholds Frozen Until 2030
The nil-rate band (currently £325,000) and the residence nil-rate band (£175,000) will remain frozen until 2030. This means as asset values rise, more estates could become liable for IHT, particularly those valued near £500,000 or £1 million. This extended freeze makes tax planning crucial to ensure that beneficiaries can make the most of available exemptions.
IHT on Inherited Pensions
Unused pension pots will now be included in an individual’s estate for IHT purposes. Pensions are currently exempt from 40% IHT rate but will no longer have this benefit from 2027. Spousal exemption still applies. Income tax rules will also still apply, meaning if the deceased dies after age 75, beneficiaries could face a double tax: IHT on the estate and income tax on any pension withdrawals from the inherited fund. This is huge change for those planning to rely on pension funds to mitigate their IHT, so it’s important to see how your pension could impact your estate.
Example:
Single persons estate valued at £600,000, consisting of £500,000 worth of assets and a £100,000 pension. Under the new rules, after relevant exemptions the IHT liability would be £40,000 (£100,000 taxed at 40%) allocated pro rata between the pension and other assets (subject to future HMRC consultation and confirmation).
If the deceased passes away before 75, there would be no income tax on the pension, but if they died after 75, the beneficiaries would pay income tax on withdrawals – creating further tax exposure.
Changes to APR and BPR
From April 2026, APR and BPR will provide 100% relief only on the first £1 million of agricultural and business assets. Any value beyond this will incur a 20% IHT rate. Although still less than the standard 40%, these reliefs have remained largely unchanged for years and will disrupt many estates who had planned to transfer their wealth through such reliefs – which currently provide full exemption.
Abolition of Non-Domicile Status
Non-domiciled individuals will now face a residence-based IHT system, which ends the use of offshore trusts to shelter assets. This change will significantly impact international clients with overseas holdings.
Steps to Consider
1. Review Your Pension Strategy
- Reassess how pension funds impact your IHT liability under new rules.
- Make the most of your 25% tax free lump sum if you have not already done so. After this, gradual withdrawals can minimise tax burden over time.
- Consider other tax-efficient strategies such as drawdowns, annuities, or other investment options to maximize your pot and benefit you in retirement.
2. Consider Protection Policies
- Explore the status of life policies linked to pensions, as they may remain unaffected.
- Life insurance can help cover IHT liabilities, protecting the estate’s value for beneficiaries. This something to keep an eye on with the new changes.
3. Explore Gifting Options
- Utilise your £3,000 annual gift exemption and £250 per person exemption.
- Lifetime gifts if structured strategically over time, and survived by seven years, can significantly reduce IHT liability.
4. Reassess Agricultural and Business Assets
- With new caps on APR and BPR, restructuring plans for transferring these assets may be necessary. Managing this combined with tax-efficient approach to succession planning can mitigate the impact of IHT on your estate.
5. Align Succession and Estate Planning
- Review your estate plan to reflect the updated IHT rules.
- Ensure your chosen beneficiaries are considered within the new regulatory framework.
- If affected by the abolition of non-domicile status, adjust plans for international assets.
Take Control of Your Finances
The steps we’ve discussed can be tailored to your personal circumstances, serving as proactive measures to safeguard your wealth and minimize your IHT burden in light of the recent budget announcements.
These new regulations will impact many of us and it’s important to stay calm and to seek professional advice for any issues that may arise within your financial situation. Although IHT reforms may seem daunting, now is the ideal time to review your finances, evaluate your assets, and explore strategies for passing on wealth while protecting your legacy.
The budget has only strengthened the importance of comprehensive financial planning, and we welcome the opportunity to discuss how these changes may affect your financial plans. Every situation is different, so if you have any questions, do not hesitate to contact us. We’d be delighted to help you adjust your plan and take full advantage of the available exemptions and reliefs.
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Disclaimer:
All the above information is provided as information only and any examples used are not indicative of financial advice to address your particular requirements. The information does not constitute any form of advice or recommendation by Melville Independent plc, and is not intended to be relied upon by readers in making any financial decisions. Melville Independent Plc is an Appointed Representative of JKFS (UK) Ltd which is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate taxation advice.
December 2024
