Metis AM
One of your top priorities when addressing your financial plan may be to ensure you take steps to pass as much of your wealth as possible to your children and grandchildren.
In the run-up to the Autumn Budget, there was much muttering about big changes to Inheritance Tax (IHT). Despite having multiple options for how the government could have adjusted the IHT regime, the ultimate changes focused on two areas that could affect your tax-efficient succession plans: Business Relief and pension funds.
Read on to find out more about the upcoming changes and how they may affect your succession plans.
Inheritance Tax thresholds remain unchanged
In the first Labour Budget in 14 years, Rachel Reeves confirmed that the two main IHT allowances will stay fixed at current levels until April 2030.
The nil-rate band remains fixed at £325,000 and the residence nil-rate band – which applies to your main residence if you pass it to your direct descendants – continues at £175,000 (with the taper starting at estates exceeding £2 million).
That means you can continue to pass on up to £500,000 IHT-free, or up to £1 million between you and your spouse or civil partner.
These IHT allowances have remained frozen since 2009. So, as house and asset values rise, the number of estates now subject to IHT continues to increase. Money Marketing reports that, in the period between April and September 2024, IHT receipts were £4.3 billion, an increase of £0.4 billion from the same period in 2023.
Business Relief is likely to undergo some changes
With IHT allowances frozen, if you have assets above the threshold, you may be using Business Relief to pass more of your wealth to the next generation.
Using Business Relief means your estate can claim 100% relief from IHT on shares or qualifying business assets, provided you owned these for at least two years before your death.
Currently, there is no limit on the amount of IHT relief you can claim.
However, from April 2026, the following changes will apply:
- For privately-owned businesses, the first £1 million that qualifies for 100% Business Relief will attract no IHT at all. Any qualifying assets that exceed £1 million will be eligible for 50% relief and subject to IHT at a rate of 20%.
- If you hold shares in qualifying companies listed on the Alternative Investment Market (AIM), from 6 April 2026, you will be able to claim Business Relief at a reduced rate of 50%, which will result in an effective rate of 20% IHT.
Trust treatment could be affected
The government plans to introduce rules to ensure the £1 million Business Relief allowance is divided between trusts. So, if you set up multiple trusts on or after 30 October 2024, this is another change that may affect you.
There will be further updates on this, but current understanding is that the tax treatment change relating to trusts will probably remove the previous benefit of settling qualifying assets into trust to get 100% relief on assets worth more than £1 million.
The government also plans to remove spouse transfer
Under the new proposals, the £1 million allowance will no longer be transferable between spouses in the same beneficial way.
From April 2026, you and your spouse/civil partner will have your own £1 million allowance.
As a result, it may become more tax-efficient for you and your spouse to each hold an interest in business property. You could then pass those interests on to your beneficiaries separately following your deaths.
This would ensure that you can both take full advantage of your individual £1 million allowance.
You may need to re-evaluate and change how your assets are structured. Please get in touch and we’ll help you understand all the ins and outs.
Not all proposals are set in stone
At the time of writing, the Business Relief changes outlined in the Budget are still only proposals. It’s expected that the government will carry out a full consultation in early 2025. As such, the proposition on the table is subject to change before final legislation is published.
Regardless, the incoming changes will almost certainly mean you need to rethink your estate plan to ensure that you fully utilise your allowances and take steps to mitigate a potential IHT charge on your estate.
Your pension savings are no longer protected from Inheritance Tax
If you have a large pension fund that you’ve been intending to use to pass wealth to the next generation free of IHT, you’ll likely need to rethink and plan again.
That’s because, from April 2027, the “loophole” that provided preferential IHT treatment to pensions will be closed.
Two years from now, if you leave unused pension funds to beneficiaries, those assets will be subject to IHT.
The government estimates that this change could affect up to 8% of estates. If you fall into this circle, it may be wise to start planning for how to distribute your wealth tax-efficiently to protect it from being eroded by IHT following your death.
Of course, one solution is to spend it while there’s still time, or you may wish to explore the idea of passing additional funds on to your children and grandchildren by gifting them away.
Support your family and reduce a potential Inheritance Tax bill through “gifting from income”
You can make regular monthly financial gifts and remove the wealth you give away from your estate as long as payments:
- Are paid from your regular income – pension or earned income
- Don’t negatively affect your own standard of living
- Are made regularly.
To ensure a gift from income is considered part of your “normal expenditure”, you must be able to show a pattern of payments over an extended period of time. Typically, HMRC looks back over the past three or four years to see how often you made the payments.
If this idea appeals, you could use this handy gifting method to:
- Help family members cover their mortgage, rent, or utility bills
- Pay into a savings account for a child under the age of 18
- Provide financial support to an elderly relative.
In the process, you can support your loved ones financially when they need it most, while also mitigating a potential IHT bill on your estate later on.
Get in touch
To learn more about the impending tax changes and how they might affect your finances and estate plan, please get in touch.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, trusts or tax planning.
