The new chancellor made it clear that there were ‘difficult decisions’ to be made if the new government was going to start plugging a £22 billion black hole which, over the weeks prior to the Budget, almost doubled into a £40 billion funding gap.
The freeze on income tax thresholds wasn’t extended, a flat rate of pensions tax relief wasn’t introduced, nor was a cap placed on the tax-free cash that an individual can take from their pension at retirement. Although capital gains tax rates have gone up, they weren’t equalised with income tax as was feared.
Here, we take a closer look at those IHT changes to help you work out what they’ll mean for you.
The NRB is currently £325,000 per person, but it can be boosted by up to £175,000 if someone is passing a family home on to children or grandchildren using the RNRB. As transfers between spouses remain tax free (that was another threat on the cards), the allowances mean a married couple passing on a family home to direct descendants can leave an estate worth £1 million before they need to pay IHT.
Currently those allowances mean only 4% of estates pay IHT, but the combination of the NRB freeze and ongoing increases to property and asset prices mean that percentage seems set to increase.
According to the Office for Budget Responsibility (OBR), the measure will raise £400 million by 2029-30.
The NRB hasn’t increased from its current level since April 2009, while the RNRB hasn’t changed since 2020.
However, that looks set to change after Reeves announced that, from April 2027, inherited pension funds will become subject to IHT. This means that if the deceased’s NRB has been used up NRB with other assets such as property or investments, the tax will become payable on their retirement savings.
According to government estimates, around 49,000 estates a year will be affected by IHT, 10,500 of which would not have been impacted without this change.
This means when someone dies, the beneficiaries see 40% of any pension fund they inherit taxed, but there is also the threat of double taxation. Unless the pension holder died before the age of 75, any inherited pension fund will also be subject to income tax at the beneficiary’s highest rate of income tax, as soon as they dip into the pot.
Financial planners have long encouraged some people to put off spending their pension savings and first spend other assets that upon death could otherwise attract IHT, as part of their estate planning strategy however, as with any financial planning decision the focus is really on the individual circumstances and overall objectives.
Steve Webb, former pensions minister and now a partner at pensions consultancy LCP, has warned that the proposed change threatens to be a ‘bureaucratic nightmare for grieving families’ too.
He points out that IHT admin can be complicated. Currently, IHT needs to be paid by the estate before probate – confirmation in Scotland - is granted and although some banks or financial institutions will be able to make payments from the deceased’s account direct to HMRC, it doesn’t help if money is tied up in property. Probate can take months, and it can be a lengthy and stressful process at an already challenging time.
Under the Government’s proposals, the executor dealing with the estate will have to contact all the relevant pension companies to obtain information about remaining benefits and who they have been left to before using that information to determine what IHT needs to be paid. Using an HMRC tool they will also need to work out how the NRB will be apportioned and contact the relevant pension companies, if it’s determined that IHT needs to be deducted before the remaining balance is paid to beneficiaries.
The proposed process is now subject to a government consultation.
Inheritance tax changes
What on the surface may have looked like a little bit of tinkering – rather than wholesale reform – could bring thousands more people into the Inheritance (IHT) net and may require a rethink for those who have already put plans in place to reduce or avoid the tax.Here, we take a closer look at those IHT changes to help you work out what they’ll mean for you.
The big freeze will be extended
In the Budget, the chancellor confirmed that the current freeze on the nil rate band (NRB) and the residential nil rate band (RNRB) – two allowances that limit the amount you can pass on to your loved ones before IHT is charged – will be extended for a further two years until April 2030.The NRB is currently £325,000 per person, but it can be boosted by up to £175,000 if someone is passing a family home on to children or grandchildren using the RNRB. As transfers between spouses remain tax free (that was another threat on the cards), the allowances mean a married couple passing on a family home to direct descendants can leave an estate worth £1 million before they need to pay IHT.
Currently those allowances mean only 4% of estates pay IHT, but the combination of the NRB freeze and ongoing increases to property and asset prices mean that percentage seems set to increase.
According to the Office for Budget Responsibility (OBR), the measure will raise £400 million by 2029-30.
The NRB hasn’t increased from its current level since April 2009, while the RNRB hasn’t changed since 2020.
Private pensions will no longer be IHT exempt
Currently, when you die any money that’s left in a private pension fund can be passed on to your loved ones free of IHT.However, that looks set to change after Reeves announced that, from April 2027, inherited pension funds will become subject to IHT. This means that if the deceased’s NRB has been used up NRB with other assets such as property or investments, the tax will become payable on their retirement savings.
According to government estimates, around 49,000 estates a year will be affected by IHT, 10,500 of which would not have been impacted without this change.
This means when someone dies, the beneficiaries see 40% of any pension fund they inherit taxed, but there is also the threat of double taxation. Unless the pension holder died before the age of 75, any inherited pension fund will also be subject to income tax at the beneficiary’s highest rate of income tax, as soon as they dip into the pot.
Financial planners have long encouraged some people to put off spending their pension savings and first spend other assets that upon death could otherwise attract IHT, as part of their estate planning strategy however, as with any financial planning decision the focus is really on the individual circumstances and overall objectives.
Steve Webb, former pensions minister and now a partner at pensions consultancy LCP, has warned that the proposed change threatens to be a ‘bureaucratic nightmare for grieving families’ too.
He points out that IHT admin can be complicated. Currently, IHT needs to be paid by the estate before probate – confirmation in Scotland - is granted and although some banks or financial institutions will be able to make payments from the deceased’s account direct to HMRC, it doesn’t help if money is tied up in property. Probate can take months, and it can be a lengthy and stressful process at an already challenging time.
Under the Government’s proposals, the executor dealing with the estate will have to contact all the relevant pension companies to obtain information about remaining benefits and who they have been left to before using that information to determine what IHT needs to be paid. Using an HMRC tool they will also need to work out how the NRB will be apportioned and contact the relevant pension companies, if it’s determined that IHT needs to be deducted before the remaining balance is paid to beneficiaries.
The proposed process is now subject to a government consultation.
"Bereaved relatives already face huge challenges in winding up the financial affairs of a loved one, including delays in obtaining probate and the need to pay IHT bills before finances may become available. Including pensions within the scope of IHT will add greatly to the burden which families face."
Steve webb, former pensions minister
Changes for agricultural property relief and business relief
From April 2026, the 100% rate of IHT relief will apply only to the first £1 million of combined agricultural or business property – thereafter relief will be cut to 50%, creating an effective IHT rate of 20%.As part of these changes, AIM shares will also no longer be exempt from IHT when they have been held for two years or more. However, they won’t fall into the £1 million allowance and all holdings will be liable for IHT at a rate of 20%.
Financial planning services can help
Family situations are constantly evolving and changing as well as the legislative and political landscape. So, an ongoing relationship with an adviser that can evolve with you while being both proactive and reactive to change can be invaluable.The information in this article should not be regarded as financial advice. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. Information is based on abrdn’s understanding in November 2024.