Estate planning will be key as inheritance tax changes are implemented

In its Budget on 30 October, the Labour Government pledged to make considerable changes to Inheritance Tax (IHT).

Generally, IHT is charged on the value of an individual’s estate on death. When calculating the value of an individual’s estate on death, gifts made within the seven years prior to death are factored in. Every individual has their own ‘nil-rate band’ (currently £325,000) which is applied against the value of their estate before IHT is charged at 40 per cent on the excess.

Several reliefs and exemptions may be available to an individual to reduce the value of their estate for IHT purposes, most notably the exemption applicable to transfers between spouses and civil partners. Additionally, where an individual’s estate passes to their surviving spouse or civil partner and their ‘nil-rate band’ mentioned above remains intact, the unused ‘nil-rate band’ can be transferred to the survivor for use on their death.

If the government’s proposals are implemented as anticipated, the basic structure of IHT as outlined above will remain “as-is”. Existing IHT thresholds (including the ‘nil-rate band’ mentioned above) will be frozen until 5 April 2030.

The primary changes relate to bringing unused pensions and death benefits within the scope of IHT, and restrictions on Agricultural Property Relief (APR) and Business Property Relief (BPR).

Currently, on an individual’s death, the value of any unused pension funds and death benefits payable from a registered pension scheme rarely form part of their estate for IHT purposes. With effect from 6 April 2027, this will no longer be the case and (subject to some exceptions) the value of any unused pension and death benefits will be factored in when calculating the value of an individual’s estate on death and assessing their exposure to IHT.

The government has published a technical consultation outlining the changes, focusing on the mechanics of implementation. It outlines how executors and pension scheme administrators will need to communicate with each other to report and pay any IHT due.

APR and BPR are reliefs applicable to certain agricultural or business assets that reduce their value for IHT purposes. They can apply at 100 per cent in many cases, essentially placing relevant assets outwith the scope of IHT.

The government seeks to cap the extent to which assets can qualify for 100 per cent relief with effect from 6 April 2026. Where assets qualifying for 100 per cent relief exceed £1 million in value, the excess value will only be entitled to relief at 50 per cent, with IHT being charged at 40 per cent on the balance. To illustrate, an individual’s shareholding in a family business valued at £1.5m would notionally be subject to IHT at £100,000 before consideration of any other reliefs, exemptions and ‘nil-rate band(s)’ available.

Additionally, the 100 per cent rate of relief currently applicable to shares designated as “not listed” on the markets of recognised stock exchanges (namely AIM), will be reduced to 50 per cent. Agricultural and business assets that qualify for relief at 50 per cent will continue to do so under the new rules with no cap.

The government has published a policy paper alongside the Budget Statement which outlines the proposed changes to APR and BPR at a high level. It is anticipated that more detail and draft legislation will appear in the coming year which may present opportunities for planning. This should be borne in mind if any estate planning steps are being considered, alongside the appropriate advice.