Inheritance Tax Reforms: What could the Autumn Budget bring?

21 October 2024

by Paul Gooch, Director at Walker Crips Financial Planning

With Labour’s first Budget in fourteen years approaching, potential changes to Inheritance Tax (“IHT”) are a large topic of conversation. This article outlines some potential changes that could impact on your estate planning. Staying informed and acting early could help you maximise the amount you pass to your family members. 

This article isn't personal advice. You should speak to a financial planner if you're unsure of the best course of action. IHT rules can change, and their benefits depend on personal circumstances. 

What is IHT?

IHT is a tax levied on the estate of a deceased person. The estate consists of their property, money and possessions. Estates valued over the current threshold of £325,000 are subject to IHT.

However, there can be some exemptions:

• Transfers to spouse or charity: Gifts made to a spouse, civil partner, charity or community amateur sports club, either during your lifetime, or on death, are not subject to IHT and do not use any of the IHT threshold.

• If your children (including adopted, foster or stepchildren) or grandchildren inherit your home on your death and the total value of your Estate is less than £2,000,000, you may benefit from the Residence Nil Rate band of £175,000, which means that the threshold at which you will pay IHT, increases to £500,000.  

• Unused threshold: If you and your spouse or civil partner have any unused threshold, including the Residence Nil Rate band, this can be added to the other spouse's threshold when they die.

• Annual Threshold: You are able to give away a total of £3,000 worth of gifts each year, without these being added to the value of your Estate. You are also able to make as many gifts of up to £250 per person as you want each tax year as long as you have not used another Allowance for the benefit of the same person.

• Gifts for wedding or civil partnership: Each tax year you can give a tax free gift to someone who is getting married or starting a civil partnership’ you can give up to:-

  • £5,000 to a child

  • £2,500 to a grandchild, or great-grandchild

  • £1,000 to any other person

• Normal Expenditure out of income: You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as;

  • The gifts are made out of your income and are not taken from capital.

  • The payments are affordable to you and your income remains sufficient to cover your usual living costs.

• 7 Year Rule: No tax is due on any gifts you give, if you live for 7 years after making the gift, unless the gift is part of a Trust. If you die within 7 years of making the gift the gift will fall back into your Nil Rate Band. Gifts in excess of the Nil Rate Band may be subject to Taper Relief.

The standard IHT rate is 40% and this is applied to the portion of the estate exceeding your thresholds.

Potential IHT Changes in the Autumn Budget

Following the Chancellor's recent announcement of a £22 billion deficit in public finances, there is widespread speculation that the government will increase several taxes in the upcoming Autumn Budget.  IHT is a likely candidate for review.

IHT generates substantial revenue for the government. IHT receipts for April 2024 to August 2024 amounted to 3.5billion, an increase of £0.3 billion for the same period last year (gov.uk). This rise is as a result of a combination of factors, including, higher volumes of wealth transfers, recent rises in asset values and the UK's nil rate band, remaining frozen at the  level of £325,000 since 2009. As a result, more people have inadvertently fallen within the IHT bracket.

Possible changes

1. Offshore Trusts 

Labour’s manifesto pledged to “end the use of offshore trusts to avoid Inheritance Tax”. This suggests that we can expect new legislative changes to bring more offshore trusts into the scope of UK IHT. Such changes would affect very few people, largely non-UK domiciled individuals.

2. Reforms to various tax reliefs 

Business Relief (“BR”) is currently available on qualifying business assets owned for a period of two or more years, therefore reducing or eliminating IHT on such assets. However, there is an indication that the government will either restrict the assets able to qualify for Business Relief or even abolish it altogether.

3. Nil-Rate Band (“NRB”) 

Unchanged since 2009, the NRB is currently £325,000 per person, which can be used against both lifetime transfers and transfers on death. By keeping the NRB at the same level, more entities will be captured under the IHT regime and subject to tax due to the ever-increasing price of assets. The NRB is therefore expected to remain frozen at £325,000.

4. Residence Nil-Rate Band (“RNRB”) 

This additional tax-free allowance, currently set at £175,000, is available if residential property is passed to lineal descendants of the deceased individual.

This Nil-Rate Band only applies to estates worth £2 million or less. There is a possibility the government will restrict the number of estates able to qualify by reducing the £2 million limit, despite the impact of above inflationary price rises in the UK housing market in recent decades.

Any changes would likely take effect from 6 April 2025.

5. Pensions and IHT
Currently, pensions are exempt from IHT and can be passed to beneficiaries without IHT applying.  No tax is due if death occurs before age 75, however, if death occurs after age 75, beneficiaries pay Income Tax at their marginal rate, on any withdrawals they make from the pension fund. 

Pensions have, therefore, become a useful tool for mitigating IHT, but there is speculation that the government may adjust the tax treatment on death. While a full overhaul would be complex, smaller changes could make the system less generous. The Institute for Fiscal Studies (“IFS”) estimates that taxing pensions could raise several hundred million pounds annually, potentially rising to £2 billion in the future. Expanding IHT to include pensions may offer the government a politically viable way to raise revenue from wealthier individuals, aligning with Labour’s goals.

Conclusion

Whatever the outcome of the Autumn Budget, it will remain crucial to make the most of all IHT allowances to which you are entitled to build your family’s financial resilience in the future.

If you need any help or advice when it comes to putting a plan in place contact the team at Walker Crips Financial Planning. Our team of experienced financial planners are on hand to offer you expert advice and guidance every step of the way.

Tax rates and legislation may change in the future. Your inheritance allowance and the value of any tax reliefs are subject to personal circumstances. Please seek advice from a financial planner.