Mitigating inheritance tax after Autumn Budget 2024

Following the Autumn Budget 2024 on 30 October, we now understand the principles of how inheritance tax (IHT) is intended to apply going forward, even though a lot of the detail remains to be confirmed. That means it’s time to think about the practical consequences, and what you can do to protect your family wealth.

What’s not changing

Many existing IHT provisions are unchanged, and for some families making use of continuing reliefs and exemptions will be enough to manage liability to IHT on a death.

Nil rate bands

The Chancellor announced that the IHT nil rate band (NRB) and the residence nil rate band (RNRB) will remain frozen, at £325,000 and £175,000 respectively, until at least 5 April 2030. This means that the first £325,000, and possibly as much as £500,000 where the maximum RNRB is available, of a person’s estate will still be taxed at 0%. Any unused NRB and/or RNRB can be transferred to a surviving spouse, so a married couple and those in a civil partnership may suffer no IHT on up to £1m of combined wealth.

Potentially exempt transfers (PETs)

Outright gifts to individuals are only subject to IHT if the donor dies within seven years of making the gift. The UK has no direct gift tax, but bear in mind that gifts are a disposal for capital gains tax (CGT) purposes, which may result in tax charges where CGT reliefs are not available.

Small gift exemptions

There are exemptions for some lifetime gifts (eg small gifts and gifts in consideration of marriage or registration of a civil partnership up to specified values) and an annual IHT exemption for gifts worth up to £3,000. However, the amounts of these exemptions have not increased since the 1980s, and they are increasingly irrelevant for meaningful IHT planning.

Normal expenditure out of excess income

Some other gifts fall out of the estate of the donor immediately, without the need to survive the gift by seven years. To qualify for this exemption, the gifts must form part of a pattern of expenditure, and be made out of income not required to maintain the lifestyle of the donor. This is potentially a very valuable relief, but it is important to take advice on how to structure and document such payments to make sure the exemption is available.

Rebasing assets to market value on death

On death, the CGT cost of assets remaining in the deceased’s estate is rebased to market value, even if no IHT has been suffered on the estate. If the surviving spouse inherits these assets, this is not a disposal for CGT purposes and the rebasing eliminates any CGT on unrealised capital gains arising during the deceased’s ownership without any immediate IHT cost.

New inheritance tax considerations

The big IHT losers in the Autumn Budget were those with large pension funds and assets qualifying for agricultural and/or business property reliefs (APR and BPR).

Pensions

From 6 April 2027, the value held in UK registered pension schemes and qualifying non-UK pension schemes will be subject to IHT on the death of the pensioner. Importantly, where the value remaining in the pension fund is inherited by the surviving spouse, no IHT will be payable. In all other cases, the pension trustee will have to account for IHT on the value of the fund.

Agricultural property relief and business property relief

From 6 April 2026, 100% relief from IHT for assets that qualify for APR and/or BPR will be capped at a combined £1m per person, with any excess value above that on qualifying assets being relieved at 50%. Investments in alternative investment market (AIM) listed shares and certain other assets will only be relieved at 50% and will not reduce the £1m allowance.

Time to reconsider inheritance tax planning

In many cases, appropriate IHT planning will remain the same after the Autumn Budget. For those who can afford it, regular lifetime giving may remain the simplest and most tax-efficient way to mitigate IHT. One-off gifts can also be effective, and IHT insurance is available to protect against the effect of death within seven years of such gifts.

Withdrawing pension income and making regular gifts from it may make sense for some. This would attract an immediate income tax charge, but could be very IHT-efficient.

The retention of agricultural and business assets as a strategy for reducing IHT will still be appropriate in some cases. The reduction in tax relief means that investment returns will need to be higher in order for it to make economic sense to hold riskier assets, but APR and BPR can significantly reduce IHT bills, even with the new allowance and reduced rate.

Planning for IHT is an important way to protect your family wealth and leave a legacy. The Autumn Budget 2024 has made this more difficult, but it remains possible to limit IHT exposure very effectively, provided you don’t wait until the last minute.

For more information, please get in touch with Andrew Robins or your usual RSM contact.