Background
This week in Muras Matters we will look in more detail at the proposed changes to Inheritance Tax (IHT) which were announced in the recent Autumn Budget.
The IHT nil-rate band of £325,000 and the IHT residential nil-rate band of £175,000 will now be frozen for two further years to 5 April 2030.
Significant changes to the reliefs that are available for qualifying business and agricultural property are set to be introduced from 6 April 2026.
It was also announced that from 6 April 2027 an individual’s personal pension fund will form part of their estate and will be subject to IHT.
Detail
Business property relief (BPR) and agricultural property relief (APR)
Currently, individuals receive 100% relief from IHT on both qualifying business and agricultural property assets.
Following the Budget, from 6 April 2026 the 100% relief will only be available on qualifying assets up to a maximum of £1m for both business and agricultural property.
For example, if an individual owns £2m of agricultural property and £1m of business property the relief will be shared proportionately, therefore £666,667 of the relief will be against the agricultural property and £333,333 will be against the business property. The executors will have no choice on how to the relief is split.
Any excess of business and agricultural property above £1m will receive 50% relief from IHT, thus it will be liable at an effective IHT rate of 20%.
It should be noted that spouses cannot transfer any unused part of the £1m allowance in the same way their nil-rate band and residence nil-rate band can be transferred.
Trusts will also be entitled to the combined £1m allowance, which will be divided amongst multiple trusts settled by an individual after 30 October 2024. Trusts settled before that date will be entitled to £1m each.
Changes to the amount of relief received on shares that are not listed on a recognised stock exchange, such as those listed on the Alternative Investment Market (AIM) were also announced. Currently, individuals receive 100% relief from IHT if the shares have been owned for at least two years. From 6 April 2026 the amount of relief will fall to 50%.
Individuals currently owning qualifying business and agricultural property should consider:
- Ensuring that both spouses’ £1m bands can be utilised by splitting assets during lifetime and will planning
- Making lifetime gifts which will fall out of the IHT calculation after 7 years
- Gifting qualifying assets to trusts before 6 April 2026 whilst more than £1m can be transferred with no immediate IHT charge
- Gifting qualifying assets to trusts after 6 April 2026 when £1m can still be transferred with no immediate tax charge
Personal pension funds
It is proposed that from 6 April 2027 an individual’s unused pension fund and any death benefits will form part of their estate for IHT purposes.
Any IHT due on the value of the pension will have to be settled from the pension fund by the pension scheme administrators. This will prevent a withdrawal being required from the fund to pay the IHT thus avoiding an income tax charge. As with other assets there will be an IHT exemption if the pension passes to the individual’s spouse. However the inclusion of the fund in the estate could lead to a reduction in another IHT allowance, the residence nil rate band.
If the pension holder dies aged 75 or over, income tax will be charged on the payment of future benefits from the pension. This is in addition to any IHT due on death, leading to a potential combined tax rate of 67%.
These changes will require individuals who had been planning to use their pension funds as a tax efficient mechanism to pass wealth to younger generations to review their strategy.
If you would like more information on any of the changes to inheritance tax, or how these changes may impact you, please speak to our Tax Director, Jenny Marks.
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