Estate Planning and the Autumn Budget – Do the changes apply to me?

There was plenty of speculation that Labour’s Autumn Budget would transform the application of inheritance tax as we had known it for many years.

As the saying goes, there is no smoke without fire: three key changes were introduced by the Chancellor that will significantly affect the way inheritance tax is calculated and how reliefs will be applied in the future to mitigate taxation. These are outlined now below.

1.     Unspent Pension Pots will be subject to IHT from April 2027

Prior to the budget pensions were being utilised as a way to pass wealth onto the next generation free of inheritance tax. Discretionary pension schemes were known to ‘fall outside of the estate’ and were not included in the calculation for IHT against a person’s estate.

From April 2027, this will no longer be the case and all discretionary pensions, to include both defined contribution and defined benefit funds will be subject to tax at 40%, if your estate exceeds the Nil Rate Band. 

The spousal exemption will still apply meaning that pension funds will continue to pass tax free between couples who are married or in a Civil Partnership, however a large cash injection into the estate of a surviving spouse is often counterproductive in efforts expended to reduce a charge to IHT.

According to HMRC’s Technical Consultation the tax on the pension fund will be paid directly from source alleviating the risk of the taxable funds becoming subject to income tax.

This does not however protect the balance funds that are to be paid out to beneficiaries. Drawings from the pensions will be subject to income tax at the marginal rate of the recipient beneficiary. If the beneficiary is a higher rate income taxpayer, their share of the balance of the pension fund could be further taxed at 45%.

Dependant scheme pensions and charity lump sum death benefits will continue to operate tax free.

2.     Reform of Agricultural Property Relief and Business Property Relief

For those individuals who own agricultural or business property the tax position has changed dramatically. From 6 April 2026, 100% relief will be available for combined agricultural and business property up to the value of £1 million. Any assets above that value will receive only 50% relief – these assets will be subject to inheritance tax at a rate of 20%.

Importantly – any unused allowance by a spouse or Civil Partner will not be transferrable meaning that relief will be applied on death to the individual’s estate. Precise planning will therefore be needed to ensure that spouses maximise the relief available to them upon first and second death.

HMRC’s Technical Consultation on the application of the relief states that the new rules will also apply to lifetime transfers made from 30 October 2024 if the Donor dies on or after 6th April 2026. The example given by HMRC involves a lifetime gift of unquoted shares valued at £2 million made on the 30 October 2024. If the person making their gift dies within 7 years, 100% relief would apply to the first £1 million and 50% relief would be available on the second £1 million leaving an IHT liability of £200,000.00. 

Existing trusts holding qualifying business property and/or agricultural property on trust will feel the effects of the change upon the 6 April 2026 with the introduction of the £1 million allowance for 100% relief. Further instructions on the application of the policy to charges on property held within trust are expected from HMRC in early 2025.

3.     AIM shares to be taxed at 20%

Inheritance tax relief on AIM shares will be limited to 50%. Portfolios will now be subject to tax at a rate of 20%. Such shares were formerly granted 100% relief under previous Business Property Relief rules.

The Nil Rate band threshold remains frozen at £325,000.00 until 2030, as is the added protection offered by the Residence Nil Rate Band that secures a further £175,000.00 for those families that are able to leave their residential property to direct descendants. These figures have been the status quo since 2010 and accordingly do not take into consideration the financial realities of today’s economic environment. As house prices continue to rise, there is no doubt that more working individuals will find their estates subject to an inheritance tax liability.

It is without doubt that these changes will have far reaching consequences on the financial planning of many individuals across this jurisdiction. Accordingly, it is imperative that individuals who are concerned about their estate contact their financial and legal advisors to reflect on the changes and to review their circumstances – especially those who have been utilising pension pots or relying on the application of 100% relief in respect of their business/farming assets.