Like capital gains tax, inheritance tax (IHT) is an area of taxation that attracted a lot of pre-Budget speculation. There was a lot of anticipation about fundamental changes to IHT and although some of the final changes are significant, e.g. pension transfers, and business and agricultural property relief, many areas of the legislation were left untouched. No amendments were made to relief available for lifetime gifts, IHT taper rates or capital gains tax on inherited property.
Unlike changes to capital gains tax, the changes to IHT do not apply from on 30 October. For instance, the business relief and agricultural relief reforms apply from April 2026 and pension reforms from April 2027.
This article outlines what has changed and the relevant timescales for any amendments to IHT which were made in the 2024 Budget.
No change to the current inheritance tax threshold
The inheritance tax threshold entitles each taxpayer to a tax-free allowance of £325,000. This was frozen by the Tory party until 2028 and Chancellor Racel Reeves has extended the freeze from April 2028 to April 2030. The £175,000 residential nil rate band is also staying for estates valued at less than £2m. Together with the £325,000 allowance this gives taxpayers a total tax-free allowance of up to £500,000. When pooled with a spouse’s allowance it comes to £1m. However, freezing the IHT allowances and the residential nil rate band threshold are continuing examples of increased tax by stealth; in many parts of the country, a £1m exemption is not enough to be able to escape paying IHT altogether. Asset values continue to rise with inflation and high property values are especially likely to be caught by IHT.
Cuts to IHT relief for business owners and farmers
One aspect of IHT that has changed significantly is the reform of previously uncapped agricultural and business property relief. These were both expected to be targeted in the Budget and the experts’ forecasts came true.
With effect from 5 April 2026, only the first £1million of combined agricultural and business property will attract 100% tax relief. Qualifying assets above this £1m limit will attract 50% tax relief. This represents an effective tax rate of 20% on business assets and agricultural estates exceeding £1m in value.
In both cases, for businesses and farms, the £1m will be treated as a ‘lifetime allowance’. It will cover the combines value on death, failed gifts in the 7 years before death, and lifetime transfers into trust. Any unused allowance will not be transferable between spouses, making forward planning for IHT in these situations essential.
Cuts to IHT relief on AIM shares
Prior to the Budget it was possible to obtain 100% IHT relief on the transfer of business shares that were not listed on a recognised stock exchange; this included AIM shares. This is also reducing to 50% tax relief although in the case of AIM shares there is no £1m lifetime allowance available. It creates an effective IHT rate of 20%, as opposed to the main rate of 40%.
Changes to IHT on trusts
Trusts will receive a combined £1million allowance. However, where a settlor has settled multiple trusts before 30 October 2024, each of those trusts will have its own £1million allowance.
Changes to IHT on pensions
One very significant Budget change affecting pension holders is the abolition of the IHT exemption from 6 April 2027. This was an easy target because the majority of pensions are defined contribution schemes which can be inherited, and also because the lifetime allowance charge was recently removed.
One controversial aspect of this change in the Budget is the effect it has depending on the age of the beneficiary when the pension is inherited. If the deceased dies on or after their 75th birthday, withdrawals from the pension by beneficiaries are subject to income tax at their marginal rate, meaning that funds could be subject to overall effective taxes of up to 67%, before reaching the beneficiary. This situation is most likely going to be the subject of a consultation due to the wide-reaching implications. Published Budget 2024 documents do not mention this, but a consultation has been announced during which it will almost certainly be raised – watch this space. In cases where IHT is payable by a pension beneficiary, it is paid directly through the pension fund.
It is likely that IHT will be subject to further changes in the Spring 2025 Budget and if you have any concerns or wish to engage in inheritance tax planning, contact us via partners@rjp.co.uk.