How will New Inheritance Tax Rules Affect your Estate Planning?

The 2024 Autumn Budget saw a range of changes to Inheritance Tax (IHT) announced, a move which has, and will surely continue to cause controversy until it’s implementation.
 

The new guidelines may mean that some people will have to reconsider their existing Estate Planning as many carefully made plans under the old rules will be impacted.
 

So, what are some of the things that can be done in the meantime to help individuals prepare for the upcoming changes? Let’s find out below.
 

An introduction to Inhertiance Tax (IHT)
 

What is IHT?

IHT is a tax that you might have to pay when you pass away. It can also apply to certain financial gifts you give while you're still alive.
 

You’ll usually owe IHT if the value of everything you own when you die (your estate) is more than a certain amount called the 'nil rate band', which is currently £325,000, by default.
 

However, the actual amount can vary based on your situation. If your estate is worth more than the nil rate band, the excess can be taxed at 40%.
 

What's included in your estate?
 

For most in the UK, your estate includes all the things you own worldwide like your home, any properties you rent out, cars, savings, investments, and personal belongings.
 

It also considers financial gifts you gave within seven years before your death, and any debts you owe will reduce the value of your estate.
 

What allowances does my estate have?
 

Allowances that you will be entitled to include:

• Your own nil rate band: This is currently £325,000 and remains fixed until April 2028. Gifts made in the seven years before your death use this first.
   
• Transferable nil rate band: If your spouse or civil partner died before you, you can use their unused nil rate band, potentially doubling it to £650,000.
   
• Residence nil rate band: If your family home goes to direct descendants, you can claim an additional £175,000 nil rate band. This can also be transferred from a deceased spouse or civil partner.
   

What about if I give my money away when I’m alive?
 

Making gifts during your lifetime can reduce your IHT bill. Generally, gifts made more than seven years before your death aren't included in your estate.
 

How is IHT calculated?
 

Upon death, your estate's value is determined by adding up all your assets and subtracting any debts. Certain gifts made within seven years before death are also considered. There's no IHT on money left to your spouse/civil partner or donated to charity. 
 

Business property relief and agricultural property relief can also reduce IHT for certain assets. If the total assets not covered by these exemptions exceed the nil rate bands, IHT is charged at 40%. The order in which gifts were made also affects the use of the nil rate band.
 

What IHT changes were in the Budget?
 

Defined contribution pensions liable for IHT

In the 2024 Autumn Budget, it was announced that from April 2027, defined contribution (DC) pensions (and potentially some defined benefit pensions as well) will no longer be exempt from IHT. 

This could add a significant amount of additional IHT liability to estates who fall under the new rules.

For example, any estates over the IHT threshold with a Defined Contribution pension balance of £500,000, could be in line for an additional IHT bill of £200,000. 

Anything passing to spouses will remain exempt, but the option of passing these assets down the generations free of IHT, has been removed.

These changes in the budget will undoubtedly have an impact on how people approach IHT planning. In future, pension funds won’t be as an attractive a vehicle for IHT planning as they have been. Instead, releasing pension funds to spend or gift is now a much more attractive option. 

New caps introduced for Business relief and Agricultural relief.

Agricultural property and Business relief (BR) have previously benefitted from up to 100% relief from IHT. 

Assets that fall under these regimes include family farms and businesses, plus a range of investment products specifically created to take advantage of the exemption. 

This relief was introduced to ensure that, if a business owner dies, the business isn’t jeopardised by a large IHT bill.

As of April 2026, IHT will be charged on combined business and agricultural property worth over £1 million at half of the normal 40% rate. This creates an effective IHT rate of 20% for any amount over £1 million. 

This could have very damaging consequences for businesses and farms, particularly where the business or farm has a high value but there aren’t sufficient non-business assets to cover the IHT bill. 

Executors will have to find the funds to pay the tax from somewhere which could result in businesses being sold off to fund the IHT.

AIM shares also lose 100% exemption

This effective tax rate of 20% will also extend to Alternative Investment Market (AIM), which were previously exempt from IHT if held for at least two years at the time of death.

These have been a popular investment option, which can be held inside an ISA, for those who wish to reduce their exposure to IHT, as their investments receive full IHT relief after two years (which is much quicker than the seven years required for gifts), and the investor still owns the assets (unlike with a gift). From April 2026 these investments will be subject to 20% IHT. 

The notable difference between AIM shares and BR and Agricultural relief is that AIM shares will not be eligible for the £1 million tax free threshold.

IHT threshold freeze extended to 2030

Finally, a great example of Fiscal drag!

The current nil rate band of £325,000 and residence nil rate band of £175,000 will be frozen until 2030, and has been stuck at £325,000 since 2009, which in real terms, means it will have been reducing with inflation for 21 years by 2030.

What can I do about IHT?

There are a number of options individuals have in light of the announced changes to IHT. These include:

• Do Nothing - You may choose not to take any specific action. While this approach is straightforward, it often results in a substantial IHT liability, potentially reducing the amount passed to beneficiaries. 
  
  It depends if choosing to pay money to HMRC is acceptable to you!
   
• Spend Your Money - Spending can be the most enjoyable way to reduce your IHT liability and for most clients, happens naturally throughout retirement. 
  
  However, for clients who want to leave legacy for their family or have a sizable estate, this option alone may not be a solution.
   
• Lifetime Gifting - Gifting assets during your lifetime can significantly reduce IHT liability, especially if done with clear planning and an understanding of future financial needs. 
  
  By working with your financial planner to determine the necessary capital for your own retirement, you can make gifts confidently, allowing you to see your family to enjoy some of the money you have worked hard to accumulate.
   
• Will Planning - Ensuring that Wills are updated and correctly structured is essential.
  
  This allows for certain allowances and reliefs to be utilised, ensuring that assets are passed on as tax-efficiently as possible. 
   
• Insuring the IHT Liability - Insurance can sometimes be used to cover IHT liabilities, especially for clients with valuable assets that are not easily liquidated (such as property or business assets). 
  
  However, it’s not for everyone - insurance premiums can be costly. This strategy  can be more suited as either a temporary solution or for clients with less liquid estates.
   
• Using Trusts - Trusts offer a flexible approach to estate planning and can help preserve wealth across generations. 
  
  Various trust structures can be integrated into a gifting strategy to provide a lasting legacy while potentially reducing IHT liability. It’s important to take expert advice on trusts given the complexities.
   
• Tax-Efficient Investing - Whilst facing some restrictions following the budget, certain investments may qualify for Business Property Relief (BPR), exempting them from some (or all!) of the IHT liability if held at the time of passing. 
  
  For example, investments in qualifying trading companies can allow clients to maintain access to their capital while benefiting from IHT relief. 

Conclusion

The 2024 Autumn Budget introduced significant changes to inheritance tax that will fundamentally reshape estate planning strategies. 

With the removal of IHT exemptions for defined contribution pensions, the introduction of new caps on business and agricultural relief, and the continued freeze of the nil rate band, individuals looking at an IHT liability must now take a proactive approach to managing their estate.

It’s well worth considering your approach to estate planning, including:

• Revisiting your strategy with your financial planner
   
• Strategic lifetime gifting
   
• Updating wills
   
• Exploring trust structures
   
• Considering tax-efficient investment options

The complexity of these changes underscores the importance of personalised, forward-looking estate planning. For help in planning your estate to account for these changes, get in touch with our team today.

 

*The Financial Conduct Authority does not regulate Inheritance Tax Planning or Estate Planning. Information correct at time of publishing.