The two Budgets in 2024 have together brought about some sizeable changes for Private Client practitioners, with much detail still to follow. Here are the main changes we know so far.
Farms and businesses
Headlines were made with the proposed changes to Agricultural Property Relief and Business Property Relief from 6 April 2026 – changing the current 100% unlimited relief, instead to 100% relief on the first £1 million of assets, with everything above that qualifying for relief at 50% – an effective tax rate of 20%. The tax due may qualify to be paid in instalments over 10 years. Chargeable assets which are agricultural and/or business assets should qualify for interest relief, meaning there is no interest to pay – a potentially valuable detail, with interest on outstanding Inheritance Tax (IHT) otherwise currently running at 7.25%.
Farmers have been very visibly protesting about these changes, with much less heard from the business community to date, despite the fact these changes could have just as large an effect on them.
Full exemptions between spouses and civil partners will still apply, but it doesn’t look as though there will be transferable allowances for couples to cumulate in the same way they can with the nil rate band and residential nil rate band.
If the total value of the property to which the 100% relief applies is more than £1 million, the relief will be applied proportionately across the qualifying property.
Similar rules will come in for trustees, for any trusts established on or after 30 October 2024, with a £1million allowance for trustees on the value of qualifying property to which the 100% relief applies, on each anniversary charge and exit charge.
The new rules will come in for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026.
AIM shares
Currently AIM shares held for more than 2 years qualify for 100% business property relief. After 6 April 2026 they will qualify for 50% relief.
Pensions
At present, most UK pension schemes are discretionary and outside the scope of IHT. With no lifetime allowance, this could give people an unlimited IHT free investment. From 6 April 2027, pensions will be included in IHT calculations and pension scheme administrators will become liable for reporting and paying any IHT.
The nil rate band will be split pro rata across the estate and pension pots. Spouse relief will still be available on any part of a pension going to a spouse or civil partner.
Non doms
The current rules on domicile and deemed domicile will change as from 6 April 2025.
At present, UK IHT applies to the worldwide assets of a UK domiciled person but only to the UK situated assets of a non-domiciled person.
After 6 April 2025, there will be a change from a domicile-based regime to one based on residence. A person will be treated as resident in the UK (and therefore liable for UK IHT on their worldwide assets) when they have been resident in the UK for at least 10 out of the last 20 tax years.
For UK residents moving out of the country, they will remain liable for inheritance tax on their worldwide estate for between 3 to 10 years after leaving the UK – an IHT “tail”. Essentially the longer you have been resident, the longer the tail will be. So, where a person leaves the UK after being resident between 10 and 13 years, the IHT tail will be 3 years. This will increase by one year for each additional year of residence, with someone having been resident in the UK for more than 19 years having a tail of 10 years.
There are also changes for offshore trusts. At present, someone who is non-dom can put offshore assets in an overseas trust and so long as those assets are kept outside of the UK, they are protected from UK IHT and this excluded status is fixed.
After 6 April 2025, trusts like this will only be outside UK IHT liability if the settlor is not classed as UK resident. This means that offshore trusts set up long ago might now be within the scope of UK IHT liability and liable to meet UK tax requirements – e.g. with discretionary trusts, the filing of anniversary IHT returns, exit charges etc.
There are also exit charges where trusts cease to be in the scope of IHT. So if a long term resident settlor leaves the UK and ceases to be long term resident, any offshore trust would become excluded property settlement again, possibly triggering an exit charge.
Allowance
The nil rate band and residence nil rate bands have been fixed at £325,000 and £175,000 respectively until 5 April 2030, meaning that against rising asset values, more estates will become liable for IHT.
Things to consider
- Careful tax planning will be needed, working out where the tax burden will fall across assets with varying degrees of relief, and those passing under the Will as well as pension pots. Where particular assets are passing to different beneficiaries, care will be needed to make sure the tax liability and burden fall as intended.
- Consider equalising asset values between spouses and maximising use of allowances on first death whilst ensuring any surviving spouse or civil partner is still adequately provided for.
- Watch for more estates being above the threshold and not qualifying for the residence nil rate band.
- Have a good succession plan, ensuring assets are in the “right” hands at the right time.
- Careful record keeping regarding offshore trusts will be required, including keeping a note of who has lived where and for how long, as well as asset values.
- Where there is a risk of potential tax liability, life insurance can be a useful option.
- People may consider changing their spending habits during lifetime – spending from pensions pots if they no longer qualify for IHT privileged status.
- The additional administration and reporting responsibilities involved in incorporating pension pots into IHT calculations mean it will be helpful if testators are organised about knowing where they have pensions and consider rationalising them – especially if they have small pots invested here and there from jobs long ago.
- We should all contribute to the government consultations on these changes. The more input there is, the more considered and robust the rules will be.
