It was once said that ‘nothing can be said to be certain, except death and taxes’ (Benjamin Franklin, American Statesman, 1789).

Inheritance Tax (IHT) unenviably combines the two and is labelled by some as a ‘tax on the dead’. Of course, it can also be relevant to events occurring during a person’s lifetime.

There had been some rumblings at the beginning of the year that the Conservative Government may have sought to abolish IHT altogether. However, the new Chancellor of the Exchequer, Rachel Reeves of the recently elected Labour Party, has today announced that IHT is here to stay for the foreseeable future albeit there will be some upcoming changes.

An overview of the current position

There are lots of nuances and intricacies in the application of IHT but generally speaking, in terms of taxation on death, IHT is payable at the rate of 40% on a deceased person’s estate on any value in excess of any available allowances, exemptions and reliefs.

The nil rate band allowance of up to £325,000, which has been frozen at this threshold for over 15 years since 06 April 2009, effectively applies a 0% rate of IHT on the value of a person’s taxable estate at death up to this amount. Crucially, a person’s taxable estate following death can sometimes include the value of gifts made during their lifetime.

For deaths occurring after 06 April 2017, an additional residence nil rate band allowance was introduced. This is now worth up to a maximum of £175,000 per person (again currently frozen until April 2028) but its availability is more limited. There are many caveats but, generally speaking, a deceased person’s estate will qualify for this allowance if an interest in a residence passes outright to one or more lineal descendants, such as children and grandchildren.

Transfers between spouses/civil partners (who are both UK-domiciled) are exempt from IHT, as are gifts to qualifying charities and political parties.

Business Property Relief of either 50% or 100% can apply in some situations if the deceased held an interest in a qualifying business interest. Similarly, Agricultural Property Relief of 50% or 100% may be available in respect of the agricultural value of land held by the deceased if various criteria are met.

Given that current IHT rules permit allowances between spouses and civil partners to be transferred to a surviving spouse or civil partner’s estate if unused on the first spouse or civil partner’s passing, a married couple or a couple in a registered civil partnership can have up to £1,000,000 worth of tax-free allowance available to offset against their joint estate.

What is now set to change?

The Chancellor has announced an extension to the current freeze of the nil rate band allowance (up to £325,000) and residence nil rate band allowance (up to £175,000) thresholds for a further two tax years – until April 2030.

From April 2026, the rules relating to BPR and APR will change with Rachel Reeves confirming that ‘the first £1,000,000 of combined business and agricultural assets will continue to attract no inheritance tax at all. But for assets over £1,000,000, inheritance tax will apply with a 50% relief at an effective rate of 20%.’ 

As ever, the devil will be in the detail subsequently released, but at this stage the exact implications of this are unclear given that, currently, there is no blanket exemption or right to 100% relief for the first £1,000,000 of these types of assets. At present, there are restrictions on the assets that qualify as relevant business and agricultural property with different rates of relief applicable in different situations. It is therefore assumed that Reeves means that no more than £1,000,000 worth of assets which are BPR or APR-qualifying assets at present and in respect of which 100% can currently be claimed will continue to be able to benefit from 100% relief from April 2026. 

Despite this, Reeves insists that the Government will ‘continue to protect small family farms’ and that three quarters of claims for IHT relief will be unaffected by these changes.

In addition, and specifically in relation to BPR, investments held on the Alternative Investment Market and other similar markets will qualify for BPR at the reduced rate of 50%. Until now, such investments have tended to qualified for relief at 100% if held by for a period of at least two years immediately preceding death.

Finally from April 2027, inherited pensions will be brought into the IHT regime. This could be significant given that, at present, pension benefits tend to pass tax-free for IHT purposes to those who inherit them. 

All in all, Rachel Reeves predicts that the above changes should raise over £2 billion in additional revenue by the end of the Government’s forecast period.

How we can help

As practitioners look to digest and assess the impact of the various taxation announcements made earlier today, many of our clients will be wondering how the impending changes will affect them and their loved ones as they plan for their futures.

In the case of IHT, some clients may be concerned about the content of their Wills and whether these will remain tax-efficient moving forwards, although it should be noted that there can be other considerations to take into account which might mean that tax ought not to always be the paramount consideration.

If you would like some assistance with updating or reviewing your Will and/or would like some bespoke estate planning advice tailored to your individual circumstances then please do not hesitate to get in touch with our Private Client team to discuss the ways in which we may be able to help you.