On 30 October 2024, Rachel Reeves, Chancellor of the Exchequer, delivered the Labour party’s first Budget in 14 years and what a Budget it was!
From an estate planning perspective, there were several seismic announcements that will likely result in far more estates having to pay inheritance tax when the proposed changes come into effect. Below, we set out the Budget’s key changes to estate planning concerning UK residents.
FROZEN ALLOWANCES
- The Nil Rate Band remains frozen at its current value of £325,000 until 6 April 2030.
- The Residence Nil Rate Band remains frozen at its current value of £175,000 until 6 April 2030.
- The taper threshold for the Residence Nil Rate Band will also remain at £2 million.
The Nil Rate Band has been at this level since 6 April 2009.
Potential impact: As property and asset prices continue to rise, it means many estates could pay (more) inheritance tax than before.
What can you do?
- Review your existing Will to ensure your wishes are up-to-date.
- Seek professional advice to ensure you are utilising the allowances, exemptions and other options available to you if you are concerned the value of your estate will attract inheritance tax.
PENSIONS
The Chancellor announced that “unused” pension funds on death and death benefits will be included in the value of a person’s estate for inheritance tax purposes.
From 6 April 2027:
- Unspent pension funds (including SIPPs) will now fall into a person’s estate when they die, where they had previously been exempt.
- Anything above the Nil Rate Band (and other allowances that may apply) will attract the full inheritance tax at 40%, although transfers to a surviving spouse/civil partner may remain exempt.
Potential impact: Adding the value of unused pension pots to a person’s estate for inheritance tax purposes will take more estates above the £2 million threshold. This is the level at which the Residence Nil Rate Band allowance starts to reduce and therefore more inheritance tax becomes payable. Also, where individuals have used their pensions contributions as an estate planning tool, they may need to revisit these plans and consider other options for tax efficiently passing on their wealth to the next generation.
What can you do? Speak to an experienced estate planner to receive advice on your inheritance tax planning options.
AGRICULTURAL AND BUSINESS PROPERTY RELIEF
The Chancellor announced reforms that will affect family business owners of commercial and agricultural assets, and those who hold shares on the alternative investment market (AIM).
From 6 April 2026:
- The 100% rate of relief from inheritance tax for business and agricultural property will only apply for the first £1 million of combined agricultural and business property. Previously, there was no cap.
- For assets above £1 million, the rate of relief will be 50%.
- Shares held on AIM, no matter the value, will qualify for a rate 20% inheritance tax instead of 0%.
Potential impact: Business owners may have to re-evaluate their succession plans to ensure their family-owned business can survive as a trading entity without having to be sold, or carved up, to settle an inheritance tax bill.
What can you do?
- Make succession planning for your business a priority if it’s important that your business can continue to trade when you pass away or became seriously ill.
- Speak to an estate planner to ensure your partnership agreement is fit for purpose (or equivalent if you have another business structure), your Will is up-to-date and any specific gifts of agricultural or business property assets that may be included are still effective, that you have maximised your allowances and exemptions, and you have appropriate Lasting Powers of Attorney in place.
CAPITAL GAINS TAX
Effective from 30 October 2024:
- The lower rate of capital gains tax has risen to 18% from 10%.
- The higher rate of capital gains tax has increased to 24% from 20%.
From an estate administration perspective, the main rate of capital gains tax that applies to Personal Representatives when administering a deceased persons estate has increased from 20% to 24%. The increased rate of capital gains tax will reduce the value that is received into an estate when capital assets are disposed of.
Potential impact: There is an extra administrative burden for Personal Representatives as they’ll have ‘gains’ which are subject to different rates throughout the 2024/2025 tax year. Specialist help may be required to ensure the correct amount of capital gains tax is applied during the administration period when administering an estate.
Please note, we still await the finer detail of these reforms as draft legislation is not yet available for the changes to pensions or business and agricultural property.
In summary, the proposed inclusion of unused pensions being added to the value of an estate for inheritance tax purposes is very significant. That reform, coupled with freezing the Nil Rate Band and Residence Nil Rate Band further, will drag more estates into the inheritance tax regime. It’s essential that concerned persons seek specialist advice for effective estate and succession planning.
Please get in touch if you would like to receive advice and assistance with making your Will or estate planning.