3 Mins
Following the budget yesterday, the chancellor has announced some changes relating to Inheritance Tax which we have outlined below.
Nil Rate Band (NRB) and Residence Nil Rate Band
These two reliefs will now be frozen for another two years until April 2030 at the current rate of £325,000 for the NRB and up to £175,000 for the RNRB.
Pensions
Currently pension pots will usually pass to beneficiaries free of Inheritance tax, however from 6 April 2027 these will now be considered to form part of the estate of the deceased individual and will be subject to IHT. This tax will be at the IHT rate of 40%.
Where the deceased has died over the age of 75, the beneficiaries will be subject to income tax on funds withdrawn from the pension they have inherited.
For example, a £2m pension pot with the nil rate band used, so on the second death £800k of IHT, leaving £1.2m to the beneficiaries. They could pay up to 48% (Scotland) income tax, a further liability of £576k. The beneficiaries are only left with £624k from a £2m pot. An effective tax rate of 69%.
This will significantly change the tax planning for many. Since 2015, our advice has been utilising other cash, investments and not to touch pensions as they could be passed on free from Inheritance tax. This potential double tax charge giving the 69% effective rate means all pension planning should be reassessed.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
In one of the bigger announcements in the budget, from April 2026, only the first £1 million of combined eligible agricultural and business assets will obtain relief at 100% with amounts of assets in excess of this, attracting relief at 50%. This will mean an effective 20% tax charge.
The allowance will be allocated proportionally between APR and BPR where estates have both types of assets held.
This £1 million allowance cannot be transferred between spouses and instead each spouse will have an allowance of their own.
Our advice in the past has been for the first spouse to leave everything to the surviving spouse. In view of this allowance not being transferrable for all couple eligible for BPR or APR we would recommend a review of previously provided inheritance tax planning.
For investments held on the Alternative Investment Market (AIM) which are eligible for BPR. Instead of 100% relief this will now be reduced to only 50% in all circumstances. It is important to note for AIM shares there is no £1 million allowance at 100% so the full value will be restricted 50% from April 2026.
It is worth noting that any lifetime transfers made after 30 October 2024 will be affected by these new rules if the death occurs after 6 April 2026.
Planning
Due to the changes, especially on pensions and APR/BPR this will significantly change the advice you may have had in previous years. Please get in touch to arrange a meeting or a call to discuss.