With very little to report in respect of Inheritance Tax for the past few budgets, this budget has produced a number of announcements which will have a significant impact.

Thresholds and exemptions

The nil rate band threshold of £325,000 and the residential nil rate band threshold of £175,000 will remain in place until 2030. For a couple (married or civil partnership), this means that there is potentially £1 million of taxable estate before Inheritance Tax is payable. Transfers between spouses and civil partners will continue to be exempt from Inheritance Tax. Transfers to individuals more than 7 years before death will continue to fall outside the scope of inheritance tax in the normal way.

Reforms to agricultural property relief and business property relief

The government has confirmed it will extend the existing scope of agricultural property relief from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or relevant approved responsible bodies.

£1 million allowance for individuals

What the government gives with one hand, it will take away with the other, by the fistful! It will reform agricultural property relief and business property relief from 6 April 2026. Currently, relief of up to 100% is available on qualifying business and agricultural assets. In addition to existing nil-rate bands and exemptions, the 100% rate of relief will continue for the first £1 million of combined agricultural and business property to help protect family farms and businesses, and it will be 50% thereafter. The government will also reduce the rate of business property relief available from 100% to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.

The government will publish a technical consultation in early 2025, however the £1 million is a lifetime allowance (similar to the BADR allowance for capital gains tax) and will apply for transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026.

Assets automatically receiving 50% relief will not use up the allowance and any unused allowance will not be transferable between spouses and civil partners.

The allowance covers the following transfers:

  • property in the estate at death
  • lifetime transfers to individuals in the 7 years before death (“failed potentially exempt transfers”)
  • chargeable lifetime transfers where there is an immediate lifetime charge, so for example when property is transferred into trust

Where the rate of relief for the agricultural property or business property is at 50%, for example quoted shares in company giving the transferor control, the rate of relief will not be affected by the new allowance.

£1 million allowance for trusts

The trustees of certain trusts are liable to an inheritance tax charge of up to 6% of the value of property held in a trust every 10 years. There is also an exit charge when property leaves the trust. Agricultural property relief and business property relief can apply to property in trust.

There will be a combined £1 million allowance for trustees on the value of qualifying property to which 100% relief applies, on each ten-year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to inheritance tax on death. The government will publish a technical consultation in early 2025 on the detailed application of the policy to charges on property within trust.

Settlors may have set up more than one trust comprising qualifying business property and/or agricultural property before 30 October 2024, in which case from 6 April 2026, each trust would have a £1 million allowance for 100% relief.

The government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.

Example

A farm that qualifies for APR/BPR is valued at £2 million on death. The normal nil rate bands have been used by other assets. Currently there will be no Inheritance Tax payable in respect of the farm on death. Roll forward to a death on or after 6 April 2026, on the first £1 million there will be no Inheritance Tax, on the balance, in this case £1 million, 50% will be taxable at 40%, so £200,000.

Pensions

Currently, unspent pension pots are not taken into account when calculating Inheritance Tax on death. This has been a hugely beneficial estate tax planning tool for a number of years. From April 2027 any unspent pension pots will be brought into the scope of Inheritance Tax.

Pension/estate planning will need to be reviewed in light of this announcement, as this could result in a significant increased Inheritance Tax charge for high value pension pots. Previously the advice has been to pay as much as possible into pensions and leave the pension pot undrawn until other sources of funds have been used. It may now be the case that uncrystallised pension lump sums are taken and gifted to the next generation, potentially taking those funds out of Inheritance Tax, provided there is a seven year survival period.

On a positive note for pensions, despite speculations, no changes to tax-free cash amounts or pension tax relief were announced and employer pension contributions remain exempt from national insurance contributions.

Please see further commentary on this topic in the pensions and investments section.

Please click here to go back to our full Autumn Budget 2024 analysis.