This year’s Autumn Statement was one of the most dreaded in years. 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, almost doubled into a £40 billion funding gap.
Once the speech was over and the endless speculation was brought to a stop, there will undoubtedly have been some relief in households across Britain. 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 tax-free cash. Although capital gains tax rates have gone up – they weren’t equalised with income tax as was feared.
However, that relief might not be shared by those with an inheritance tax (IHT) liability to mitigate. What on the surface may have looked like a little bit of tinkering – rather than wholesale reform – could actually drag thousands more people into the IHT net and cause a major headache 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 her 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 is only going to increase.
According to the Office for Budget Responsibility (OBR), the measure will raise £0.4 billion 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 private pensions 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 an individual has used up their 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, 10,500 of which would not have been impacted without the change.
The news will come as a huge blow to families, particularly those where someone ends up dying earlier than anticipated, with a hefty pot of unspent retirement savings. Not only will their beneficiaries see 40% of any pension they inherit paid to the taxman, but there is also the threat of double taxation. Unless the pension holder died before the age of 75, any inherited pensions will also be subject to income tax at the beneficiary’s highest rate of income tax, as soon as they dip into the pot.
Furthermore, the changes will force some people to review or unpick plans that have already been put in place – pensions will become a less attractive a way to cascade family wealth down the generations. Financial planners have long encouraged some people to put off spending their pension savings and call on other assets that are free of IHT first, 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.
But it’s not just the tax bill that families will need to worry about. 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 is already headache-inducing. Currently, IHT needs to be paid by the estate before probate 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. And with probate often taking months, it can be a lengthy and stressful process at an already challenging time.
Under the government’s proposals, the person 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.
Thankfully, the proposed process is now subject to a government consultation.
Webb said: ‘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. People will need to know which pension schemes to contact, will have to rely on the efficient administration of pensions – with the whole process on hold until the slowest scheme has replied – and then potentially wait months more before death benefits and pension balances can be released by the scheme.
‘The whole thing could turn into a bureaucratic nightmare for grieving families. If this proposal is to go ahead, the government will need to come up with a much more streamlined process than is currently proposed.’
Changes for agricultural property relief and business relief
There was also bad news for those wanting to tax-effectively pass on farms or businesses to younger generations with changes to both agricultural property relief and business relief for IHT.
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.
A financial adviser provides tailored advice that considers your family and your unique financial situation. They can be incredibly valuable during periods of change and uncertainty, offering emotional support, reinforcing long-term goals, and providing evidence-based strategies.
If you’re not sure how the changes to IHT could affect you, or are concerned about the impact, you could consider getting financial advice. Find out how abrdn's financial planning services could help you.
Keep up-to-date with the latest news and insights
If you want to keep up-to-date with the latest tax changes, you can read our regular news and insights updates from our financial planning experts. You can also listen to our Wealth Wise podcast, hosted by Fraser Kerr, abrdn’s Financial Planning Director. Tune in for the latest discussions with our clients and insights from industry experts on investment markets, tax changes, retirement planning, and more.
This content is based on an article by Rachel Lacey for ii.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. 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.
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