It was known in advance of the Autumn Budget that the Government was going to make some changes to the Inheritance Tax system. Apparently the Government is making the inheritance tax system fairer.
There have been no changes to the Inheritance Tax Thresholds.
Nil-rate band and Residence Nil-Rate band
The Inheritance Tax nil-rate bands were already set to be frozen at current levels until 5 April 2028 and have now been confirmed that they will stay fixed at these levels for a further two years until 5 April 2030. The nil-rate band will continue at £325,000 (the allowance set in 2009), the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2 million. Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an inheritance tax liability.
Significant changes that were announced:
Unused pension funds and death benefits
The Government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027. Whilst this will have a significant impact for many given the pension flexibilities now afforded, this will restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pensions reforms.
Agricultural Property Relief and Business Property Relief
The Government has announced that it will reform these inheritance tax reliefs from 6 April 2026. In addition to existing nil-rate bands and exemptions, the current 100% rates of relief will continue for the first £1 million of combined agricultural and business property to help protect family businesses and farms. The rate of relief will be 50% thereafter, and in all circumstances for quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
This is a significant step, and will impact the potential Inheritance Tax position for agricultural estates and the general farming sector especially. The Government calculates that this will affect around 0.3% of estates each year, however it feels like the impact will be greater than that. In effect this will bring in a 20% Inheritance Tax charge on amounts in excess of £1m.
Finally the Government has announced that it will invest £52 million to digitalise the inheritance tax service from 2027-28 to provide a modern, easy-to-use system, making returns and paying tax simpler and quicker, which can only be of benefit in a modern society.
If you have any questions about how the budget or its proposed reforms might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.
