Within the budget, Labour delivered crucial updates on their plans for Inheritance Tax, including the inclusion of pension pots in inheritance tax calculations as of April 2027.
Inheritance tax is a levy applied to the estate of someone that has died. Currently, only about 4% of estates end up paying, as most fall below the tax threshold.
These thresholds are being extended until 2030, and it is unclear what changes will be made to inheritance tax after then. The Chancellor also announced that inherited pensions will be included in inheritance tax from April 2027.
There will also be significant reforms to agricultural and business property reliefs. These changes are expected to generate an additional £2 billion annually. Specifically, the relief available for business and agricultural assets will be capped at £1 million per person. Any value above this threshold will be taxed at an effective inheritance tax rate of 20%.
Deputy Head of Wills, Trusts & Probate at Jackson Lees, Chris Stone, weighs in on what the most recent announcements mean for you:
The budget announcement by the Chancellor in relation to inheritance tax can probably best be described as unsatisfactory but not as unsatisfactory as it could have been. In the lead up to the budget, it had been thought that the Chancellor may announce an increase in the inheritance tax rate or an extension in the 7-year rule for lifetime gifts to 10 years.
“It is disappointing that the nil rate band remains frozen until 2030 (it has remained at £325,000 since 2009) as the impact of inflation over that time has meant and will mean that more estates will be caught by the inheritance tax trap. A tax that was originally meant for the wealthy is now a tax for many more to be wary of.
“In addition to the freezing of the nil rate band, the decision to bring into account inherited pensions for inheritance tax means that many of our clients that have been planning to leave their pensions to family members, on the understanding that those pensions will fall outside of their estate for inheritance tax purposes, will now have to think again. It is welcomed that this will not come into force until 2027, but many clients will need to reconsider their financial planning arrangements in lifetime and on death.
“The introduction of an inheritance tax charge on clients that have business interests if their business assets exceed £1m could be disastrous for the continuity of their business and the communities that they support following their death.
“Similarly, the introduction of an inheritance tax charge on AIM investments will mean that clients that had relied upon the business relief exemption may now consider whether to withdraw from those investments given that they are typically considered as a riskier investment.
“We manage many trusts where clients who are vulnerable have received personal injury awards. Today’s increase in the capital gains tax rates further penalises those vulnerable clients following the reduction of the capital gains tax allowances over the last few years made by the previous government.”
If you fear you will be impacted by the upcoming changes to inheritance tax, we are here to help. We can help with careful inheritance tax planning to ensure that your estates do not end up paying more than they should.
Our Wills, Trusts and Probate department can guide you through the process in the most effective and efficient manner. They take the time to listen to all the circumstances of your case before suggesting the best solution. Call us on 0151 282 1700 or make an enquiry to speak to a specialist.