The impact of the Autumn Budget 2024 on Inheritance Tax

The Autumn Budget 2024 has introduced significant changes to Inheritance Tax (IHT) landscape, with Chancellor, Rachel Reeves, announcing the extension of the nil rate band freeze until 2030 and the inclusion of pensions in IHT calculations from April 2027. These changes are poised to impact estate planning and the financial legacy left to future generations.

Extension of the nil rate band freeze

The nil rate band, which has been frozen at £325,000 since 2009, will now remain at this level until 2030. This means that the amount of wealth that can be passed on, free of IHT, won’t increase with inflation or rising property prices. As a result, more estates will fall within the IHT net, particularly in areas where property values have increased. The residence nil rate band, which allows an additional £175,000 to be passed on tax-free if a home is left to direct descendants, will also remain unchanged.

Pensions subject to IHT

Starting from April 2027, unused pension funds and death benefits will be included in the estate for IHT purposes. This marks a significant shift from the current rules, where pensions have generally been excluded from IHT calculations. By including pensions in the estate value, beneficiaries may face a 40% tax on amounts above the nil rate band. This change is expected to affect around 8% of estates each year and add an estimated £1.5b to IHT receipts by 2029-30.

Agricultural and business property relief limits

In addition to these changes, the Autumn Budget has set the limits for Agricultural Property Relief (APR) and Business Property Relief (BPR) at £1m. These reliefs reduce the value of assets transferred at death for IHT purposes, and the new limits will impact the number of estates eligible for significant IHT relief. Estates with agricultural or business properties exceeding these limits will face higher IHT liabilities.

Implications for estate planning

The combination of the nil rate band freeze, the inclusion of pensions in IHT calculations, and the new APR and BPR limits, will require individuals and families to rethink their estate planning strategies. With more estates falling within the IHT net, it will be sensible to explore options such as gifting, trusts, and insurance products to mitigate the tax burden. Additionally, the changes may prompt a re-evaluation of retirement savings and decumulation strategies, as the tax advantages of pensions are reduced.

Increased administrative burden

With more estates subject to IHT, personal representatives (PRs) and pension scheme administrators (PSAs) will face a greater administrative burden. PRs will need to complete IHT forms and pay any due tax before applying for probate, making the probate process more complex. PSAs will also have to report unused pension assets and pay IHT directly to HMRC, lifting this burden from PRs.

Conclusion

The Autumn Budget 2024 has introduced significant changes to IHT rules. The extension of the nil rate band freeze, the inclusion of pensions in IHT calculations, and the new APR and BPR limits will have affect estate planning, financial legacy, and the administrative processes involved in probate. Individuals and families should stay informed and take professional advice to navigate these changes effectively.

Need help?

Contact your Larking Gowen advisor to discuss these issues and how they might impact your estate in the future. We can also help you with the whole probate process so please don’t hesitate to get in touch if you’d like to know more about how we can help. 

Nina Baker