Budget 2024: How will the IHT changes affect your estate planning?

by | Oct 31, 2024 | Blog Posts

IHT budget

It’s safe to say that yesterday’s budget will have wide ranging consequences for many people around the country. Here, I’ll take a look at what the budget means from an estate planning point of view.

There are two taxes that have the biggest bearing on estate planning: Inheritance Tax (IHT) and Capital Gains Tax (CGT). The changes to CGT were surprisingly limited so I will focus on the budget changes to IHT.

| Inheritance tax rates

Perhaps surprisingly, the government has not changed the actual rates of IHT and the available allowances. This means that an individual has a nil rate band of £325,000 and, if they own a residence and are leaving it to their descendants, a residence nil rate band of up to £175,000. The only change here is that the nil rate band will now be frozen until 2030 (from the previous date of 2028). It’s been stuck at £325,000 since 2009 which, in real terms, means it will have been reducing with inflation for 21 years by 2030.

There will be two very significant changes to IHT. Although these won’t affect the majority of people, the consequences for those who are affected could be significant:

| IHT and pensions

Many people have pension pots which, under the current rules, can be passed to beneficiaries without attracting IHT. For years it’s been sound advice from an IHT planning point of view to get money into these pensions. If people were considering spending savings or making gifts, the advice has been to leave the pensions alone and use other assets.

As of April 2027, however, the value of pension pots will be included in the IHT calculation. This means that 40% of these pension pots will be paid in tax if the estate is already over the IHT limits. Anything passing to spouses will remain exempt, but the option of passing these assets down the generations free of IHT has now gone.

These changes in the budget will have an impact on how people approach IHT planning. Releasing pension funds to spend or gift is now a much more attractive option. It’s certainly not an incentive for people to invest in their pensions.

Business Property Relief and Agricultural Property Relief

Under the current rules, many business and agricultural assets receive 100% relief from IHT. The rules regarding what does and doesn’t receive the reliefs are somewhat complicated. But, very broadly speaking, businesses will likely receive the relief as long as they aren’t mainly involved in owning investments. The reason the relief was introduced is to ensure that, if a business owner dies, the business isn’t jeopardised by a large IHT bill.

As of April 2026, IHT will be charged on combined business and agricultural property worth over £1 million at half of the normal 40% rate. This could have very damaging consequences for businesses and farms, particularly where the business is valuable but there aren’t sufficient non-business assets to cover the IHT bill. Executors will have to find the tax from somewhere which could result in businesses being sold off to fund the IHT.

IHT and AIM shares

There are also changes to the IHT relief on shares that are traded on the alternative investment market (AIM shares). These are shares that are available to the public to buy. Once the investor has owned the shares for two years, they receive the 100% business property relief.

Many investment portfolios only invest in AIM shares. These have been a popular investment for those who wish to reduce their exposure to IHT as their investments receive full IHT relief after two years (which is much quicker than the seven years required for gifts) and the investor still owns the assets (unlike with a gift). From April 2026 these investments will be subject to 20% IHT.

The result of both of these changes is that estate planning advice that has been sound for many years, now needs to be reconsidered. People will have made investment decisions on the basis of tax rules that are shortly going to change significantly.

If you think these IHT budget changes might affect you, it is worth considering reviewing your will. We offer a free will review service. Just make an appointment online or call us on 0800 988 7756.

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