Inheritance Issues

Elaine Lightfoot

Before the Autumn Budget there had been substantial speculation about Labour’s possible tax changes, not least in respect of Inheritance Tax. Partner and Head of Private Client Elaine Lightfoot takes a look at what transpired.

In terms of Inheritance Tax (IHT), the main, unaltered, allowances, will remain as

• The nil rate band will continue at £325,000 - frozen until 5 April 2030.
• Residence nil rate band continues at £175,000 (subject to an estate containing property and it being inherited by direct descendants) and;
• The residence nil rate band taper will continue to start at £2 million.

Rachel Reeve’s first budget did, however, see the introduction of a number of tax rises specifically with regard to Inheritance Tax, including several changes due to come into force in April 2026 (a reduction in the availability of Agricultural Property Relief and Business Property Relief on estates) and in April 2027 with regard to inherited pensions.

Agricultural and Business Property Relief changes

From April 2026 a cap will be introduced on the relief available for businesses and farms with only the first £1 million of combined business and agricultural assets remaining free of inheritance tax (100 per cent relief).  For assets over the value of £1 million, the rate of relief will reduce to 50 per cent (rather than the 100 per cent relief in place currently) thereby leading to an effective rate of inheritance tax payable of 20 per cent (rather than 40 per cent).

Such changes will inevitably affect the future of family businesses adversely. Commentary across the sector has included great concern particularly in respect of businesses with little to no liquid assets with which to meet IHT payments on death.  Victoria Vyvyan, President of Country Land and Business Association, said: “Many farmers are operating on slim margins, will now face having to sell land to pay inheritance taxes. At a time of profound change in the industry, adjusting to new agricultural policies, the Government is offering no vision for a positive economic future for us in the rural community. We will continue to argue the case for these vital reliefs.”

I do have concerns, particularly with regards to the practicalities of estate administration where there is little to no liquidity within the Estate. The changes will inevitably lead to the sale of some agricultural land to meet inheritance tax bills for various farms. Worse still, in cases where there are insufficient readily available liquid assets to meet any inheritance tax bill, Executors will be forced into a position to borrow funds to meet IHT in order for estate administration to be undertaken.

Shares designated as “not listed” on the recognised stock exchanges (such as AIM) will also be subject to the same reduced rates of business property relief as above.

Pension changes

Pensions have also been affected by the Budget. Currently, most pensions are excluded from payment of inheritance tax on death. However, as of 6 April 2027, on death, the value of any undrawn pensions will be added to other assets and could potentially form part of a chargeable estate.

Mike Ambrey, retirement savings director at Standard Life stated “Pensions have been seen as a useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules. Now the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way. This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement. In time, we’re likely to see more pensions accessed earlier to prevent them from becoming part of people’s IHT bill at a later date”.  It is estimated that this will affect around eight per cent of estates each year. An enquiry is due to be launched in January 2025, the outcome of which should provide further information.

It is always recommended that individuals review their wills on a periodic basis to ensure that they are fit for purpose. Due to the imposed changes, a greater proportion of estates will now be affected by inheritance tax and may wish to undertake bespoke lifetime tax and financial planning not least to ensure continuation of family businesses (whether agricultural or not) following the death of owners.