Changes in Inheritance Tax – What You Need to Know
In October last year, the Autumn Budget brought changes that have impacted Inheritance Tax thresholds, rules and allowances. In this article, our estate planning and inheritance tax specialists discuss some of the most important changes coming into effect.
Firstly, What Hasn’t Changed in Inheritance Tax Rules?
The threshold for paying Inheritance Tax, known as the Nil Rate Band, remains the same (as it has been since 6th April 2009). The Nil Rate Band of £325,000 per individual is an allowance that each person has before their estate is taxed. The surplus value above £325,000 is taxed at 40% (unless eligible for any other exemptions or reliefs).
Also, the Residence Nil Rate Band introduced in 2017 remains in place. This is an additional allowance of £175,000 per person deductible from the value of their residence. There are however criteria to be fulfilled to be eligible to claim it and therefore it is not an allowance that is available to everyone. For example, the property must have been your residence, i.e. you must have lived in it; your property (or proceeds of) must be inherited by your children or grandchildren (i.e. direct descendants), this includes stepchildren/step grandchildren; and the gross value of your estate must be less than £2 million (taper relief will apply up to £2,175,000 for an individual and £2,350,000 for a married couple/civil partnership).
Both nil rate bands are transferable still between spouses and civil partners.
Learn more: How Inheritance Tax works: thresholds, rules and allowances.
What Has Changed?
Changes to Pensions and Inheritance Tax
Pensions historically have not been included in the Inheritance Tax calculation, but the Autumn Budget brings the value of your private pension into the estate calculation for Inheritance Tax in April 2027. Pensions will still be administered after death by the pension trustees, they do not form part of your estate, so will not be dealt with by your Will. The only change is that the value of your pension is subject to 40% Inheritance Tax if you are already over the thresholds available.
If you are unsure of what to do as a result of this change, please speak to an independent financial advisor.
New Limits on Agricultural Property Relief (APR) and Business Property Relief (BPR)
Currently, APR and BPR are available at 100%, which means that if the assets qualify for one of the reliefs, the whole value of that asset will be free of tax.
In April 2026, the reliefs will be limited to £1 million per person. The surplus value will be subject to Inheritance Tax at 20%.
This will have a massive impact on farmers and businesses, so it is important to start estate planning in plenty of time. You may wish to consider transferring assets during your lifetime. Any lifetime gifts will be counted back in the IHT calculation if the donor dies within 7 years. Whilst APR and BPR are available on lifetime gifts, it is important to consider that the criteria for the relief will still have to be met by the transferor at the time of the gift and the transferee at the time of the transferor’s death.
How to Prepare for the Inheritance Tax Changes
If you would like any help in navigating the changes that have come about following the Autumn Budget, whether that be with Inheritance Tax or Estate Planning, contact Bridge McFarland LLP today by calling 0800 987 8800 or email [email protected].
Our dedicated private client team is ready to assist you with a variety of matters relating to your estate, including:
