Careful planning required around new Inheritance Tax rules

January 30, 2025

As you may already be aware, the Chancellor announced significant changes in the Autumn Budget to the availability of Business Property Relief and Agricultural Property Relief for Inheritance Tax purposes.

In summary, the changes will mean that after 5 April 2026, when an individual passes away and they have assets that qualify for Business Property Relief or Agricultural Property Relief, the rate of relief will only be 100% on the first £1m of assets that do not pass to a surviving spouse.

Thereafter, for any assets valued at over £1 million the rate of relief will be reduced to 50%.  The effect of this means that on assets that qualify for the 50% Relief (i.e. assets in excess of £1 million), the effective rate of Inheritance Tax will be 20%.

For many business owners, these changes will likely cause you great concern.  You are likely to have structured your affairs to manage the value that you have created within the business but will now need to act to ensure that robust plans are in place to mitigate the impact of these changes.

Government consultations on all the changes to IHT that were announced in the Budget are also ongoing, with a separate consultation ongoing regarding the general announcements on business property relief / agricultural property relief also taking place. Further details are also expected to be released by the government in the coming weeks.

Pensions

The Chancellor also announced changes to pensions.  Currently, pensions are generally exempt from Inheritance Tax which makes them a useful part of estate planning and Inheritance tax mitigation.  However, new rules come into effect in April 2027 which will essentially bring pensions within the scope of Inheritance tax.  Whilst HMRC are still consulting on this it is important that you start to consider this now.  For example:

  • What level of income do you need for your living costs, and can the pension replace other sources of income?
  • How much of your pension income can be drawn in a tax efficient manner to utilise your tax bands?
  • Where drawing additional income from your pension could push you into a higher tax band, could tax efficient investments such as EIS and VCT be considered to help mitigate the tax impact?
  • Can gifts be made to utilise the IHT gift exemptions, such as normal expenditure out of income, and to help pass assets to the next generations to reduce your overall IHT liability?

Understanding the impact to you

The changes announced in the Autumn Budget are likely to have a significant impact on many individuals’ IHT liability. It is therefore vital to take advice to fully understand the impact of the changes before considering the available options and next steps.

By ensuring you’re fully aware of the impact of these changes you can then start to prepare a plan and take the appropriate steps to protect your business and your family wealth and ensure that this passes intact to the next generation.

For example, it is advisable to consider the following:

  • Cash flow of the executor and their ability to be able to pay any potential IHT liability. For example, if your wealth is mainly held in shares or land then it may be difficult to realise cash to settle the tax liability.
  • Make gifts if possible. The changes announced by the Chancellor may mean you should consider passing on assets to your family now.
  • Review Wills of the family.
  • Review any wider succession plans for your business.
  • Consider the pension changes and due to come into force in April 2027.

We can offer a review of your Inheritance tax position for a fixed fee.  This will highlight your potential exposure and suggest strategies to mitigate this.  To discuss this further or arrange a review please contact a member of our Personal Tax Team on 0191 256 9500 or email advice@r-m-t.co.uk.

Recruitment

Our key focus is outstanding client service. We are always on the look out for high quality team members in the following areas…

If you would like to be part of a progressive, growing practice please upload your CV here.

  • Accepted file types: pdf, doc, png.
  • This field is for validation purposes and should be left unchanged.