On 30 October, Rachel Reeves delivered her first budget. This guide does not give all the answers, as some further consultation on the tax changes will follow, but our private client team is now well versed in the proposed changes as announced and the timetable, and you can rely on us for the necessary support during this time of change.
Inheritance tax - the headlines
There are several changes to inheritance tax, which will need to be considered closely, but many aspects of the tax remain the same.
- The nil rate band (currently £325,000) will be frozen until 2030. There are no changes to the residence nil rate band which remains available (currently £175,000).
- From April 2027, inherited pensions will be subject to inheritance tax.
- Business relief (broadly granted in relation to ownership of a business that is trading) and agricultural relief will be less generous from April 2026. The headlines provide that the first £1 million of qualifying assets will benefit from either or both reliefs, in the usual way, at 100%. However, assets over £1 million will no longer benefit at the full rate of 100%, with a reduced relief of 50% applying.
- The relief will be cut to 50% on AIM listed shares from April 2026. Any AIM holdings will not count towards the £1 million allowance for business and agricultural relief.
- The seven-year rule on gifting both outright and into trust remains.
Capital Gains Tax – the headlines
- There has been an increase in the capital gains tax rate to 18% (lower rate) and to 24% (higher rate). This was not in the 30% range as had been expected nor is there any alignment to income tax rates. Trusts will pay 24% capital gains tax on all gains going forward.
- Holdover relief remains unchanged.
Business owners and farming families
The impact to agricultural relief and business relief represents a very significant change for families, restricting 100% relief over the £1 million of value. Eligibility of relief at 100% has allowed entrepreneurial and farming families to successfully pass assets to the next generation without the cashflow issue of paying inheritance tax up until the latest budget.
In addition many families hold part of their wealth in trust with such trusts also benefitting from 100% relief at each required 10 year valuation points. It would appear that whilst trusts will also benefit from the £1 million allowance, over and above that, the relief will also be restricted as indicated above.
Understandably, these families will be concerned about their long-term succession plan and the daunting prospect of having to fund inheritance tax after April 2026.
Consultation
There will be a consultation starting in January 2025 regarding the charging regime for trusts. It may well be appropriate to accelerate the transfer of wealth to the next generation either outright or into a new trust prior to the rule changes in April 2026. We can help you with this decision, but some further analysis is required regarding the anti-forestalling measures which appear to impact transfers made on or after 30 October 2024. In addition, many clients will want the benefit of the detail of consultation, which is expected at some point next year prior to making any significant transfers. Changes to the proposals could also be made after the consultation process, and we will stay very close to the details to allow us to guide you on the best approach for your family in the coming months.
Will review
For clients with wills that incorporate gifts of agricultural and/or business assets would be well advised to review their wills to ensure that they remain as tax efficient as possible post 6 April 2026 in the coming months. In the meantime, your current will structure (unless your personal circumstances have changed) is likely to still be inheritance tax efficient.
If you die before 6 April 2026 agricultural relief and business relief would still be available at a rate of 100%. Your current will structure is likely to factor this in if we have drafted this for you and advised on the most suitable structure in recent years.
In short, we have some time to review your wills, but if you would like a coffee to discuss the likely impact please contact us.
It would also appear that the £1 million allowance for business and agricultural relief will not be transferable between spouses and so maximising this via each individual will structure will be important.
It will be possible for inheritance tax on business and farming assets to be paid over 10 years, but this will not be without a significant interest charge, which our estates team will be best placed to advise on.
Trusts
Existing trusts will need to be reviewed prior to 6 April 2026. It would appear that trusts already created will each benefit from the £1 million relief at the 10-year charge point. There are many reasons to potentially retain those trusts as part of an overall wealth planning strategy.
There is nothing in the budget to prevent the creation of a new trust, and many families will want to explore this as a way of passing assets down to the next generation while they are alive, with some control involved via the terms of the trust. Detailed advice will be needed.
Pensions
Unused pension funds and death benefits will be added to the value of a person’s estate for inheritance tax purposes from 6 April 2027. The budget announcement provides that the responsibility for reporting and paying inheritance tax will fall on the pension scheme administrators but we are here to support that reporting. Again, as more detail becomes clear, there will inevitably be planning opportunities, and in conjunction with our trusted business partners, a revised pension strategy might well be required.
Lifetime gifts
We understand there will be a clamour to consider making lifetime gifts to the next generation. One of the stings you will need to be aware of is that if the person making the gift of relievable assets (business or agricultural) dies after 6 April 2026 but within the 7-year period of making the gift, it will be assessed by reference to the new rules rather than the current rules.
At present, if the relievable asset is still owned by the recipient and the donor dies in the 7-year period, then the relief is not clawed back, but the anti-forestalling provisions change this. It may well be that the risk of inheritance tax exposure can be supported via a life policy to cover that relevant period.
Clearly, this will not be possible for everybody, particularly those with poor health or who find the cost prohibitive, but it will be a solution to be considered. However, the good news is that despite speculation, the 7 year potentially exempt transfer window does still remain available for gifts. Deeds of variation remain available as well to divert an inheritance.
Summary
As ever careful and considered planning should allow for the use of all available allowances under this new regime we are ready to support you and your family to navigate these very challenging alterations to inheritance tax.
