2024 Budget – Inheritance Tax Changes

As expected, Rachel Reeves brought in some significant alterations as to how Inheritance Tax will be calculated in the near future.

1. Rates and Allowances

The first thing to say is that these are to remain largely unchanged.  The basic Inheritance Tax allowance – the sum that anyone can pass on free of tax at their death – remains at £325,000.  This rate was brought in on the 5^th April 2009 and is expected to remain at that figure until 2030! An effective stealth tax of some significance.

The second allowance which applies where you leave your main residence to your children or grandchildren known as ‘Residence Nil Rate Band’ also remains in place and is unchanged at £175,000.

2. Agricultural Property Relief (‘APR’) and Business Property Relief (‘BPR’)

APR generally applied to farmland and assets used directly for agricultural use, including farm buildings and machinery.  BPR relates to an interest in an active trading company, including unquoted shares on an alternative stock exchange (e.g. AIM shares).

Relief for these assets was, in many cases, available at 100%, but for those dying on or after the 6^th April 2026 new rules apply.  Instead, the first £1,000,000 will remain free of tax, but the balance above that figure will get 50% relief, therefore tax at 20% would apply.

There have been headlines in the papers mentioning the effective tax free sum of £3,000,000.  This can apply to a married couple who have such assets and is calculated as follows:-

For two people who jointly own a farm and intend to pass this to their children or grandchildren, they, first of all, have their combined allowances of £500,000 each (£325,000 plus RNRB of £175,000).  They also have the revised £1,000,000 tax free allowance for APR giving each a total of £1,500,000.  This does mean that they will need to pass on their APR qualifying assets on the first death as (unlike the main allowance and RNIB for married couples) the APR allowance is not transferable.

3. Pensions

The headline here is that unused pensions funds and death benefits are to be added to estates for Inheritance Tax purposes from the 6^th April 2027.  The reason for the further year’s delay, compared to the new APR/BPR rules, is the time needed to set up appropriate reporting arrangements with pension scheme administrators.  Unlike APR and BPR, there is no partial relief available.  We will go from 0% IHT on the 5^th April 2027 to 40% overnight.

It is of course very early days in terms of these changes and no doubt various strategies will be developed over the coming years to try to alleviate the new charges that are being implemented.