The recent UK Budget introduced new measures which will have an impact on estate and Inheritance Tax planning in the future. New measures were introduced to bring more assets into the Inheritance Tax (IHT) calculations along with an extension of the freeze on thresholds. These measures will raise more IHT than ever before.
Freeze on the nil-rate band extended to April 2030
The nil-rate band is the threshold below which you do not pay IHT. This is currently set at £325,000. If your estate is less than that your estate will pay no IHT. Previous governments had frozen the nil-rate band at this level until April 2028. However, the Chancellor extended the freeze and it will now last until April 2030.
In addition, the residence nil-rate band, currently an allowance of £175,000 where you leave your main residence to your direct descendants remains unchanged. The freeze on this allowance has also been extended to April 2030.
Agricultural and Business Property Relief
Farmers and family business owners enjoy an unlimited allowance on any agricultural or business property they owned at the time of their death. The reason for this was to allow families to pass on their farms and businesses to their children.
However, a change is being introduced that limits the value of the tax free element to the first £1 million. That means that any agricultural or business property worth in excess of that amount will be liable to IHT.
The current rate of IHT is 40% on all estates above the nil-rate band. However, in the case of agricultural and business property, the rate charged on these types of assets will be 50% of the current IHT rate. That means the rate to be charged on the value of assets over the £1 million threshold will be 20% at current rates.
This change is being introduced from 6th April 2026, after which agricultural and business property in excess of £1 million will be accountable for IHT.
Clearly, it is essential to consider the implications of these changes and how these might affect your estate and Inheritance Tax planning.
Unused Pensions to form part of your estate
Another change announced in the UK Budget was the inclusion of unused pensions in estates. At the moment, any unused pensions sit outside an estate with the proceeds going to whoever has been nominated to receive them. Some had used this loophole in their estate and Inheritance Tax planning to nominate someone other than their spouse to receive this value free of IHT. There are no IHT implications between spouses so this was a vehicle which could be used to leave potentially substantial sums to children and grandchildren free of IHT.
However, from April 2027, unused pensions will now form part of your estate and will be included for IHT purposes.
The UK government has launched a technical consultation to determine how this can best work in practice.
Specialist Estate and Inheritance Tax planning solicitors, Dunfermline, Fife
Stacey Parker and her team specialise in advising clients on all aspects of Wills, Powers of Attorney and estate and Inheritance Tax planning in Dunfermline, throughout Fife and across Scotland. If you would like to discuss how the recent Budget changes affect you, please get in touch with us.
