25. 03

New Inheritance Tax Rules and What They Mean for You

New Inheritance Tax Rules
The dust is starting to settle after the October budget, and now’s the perfect time to look at some of the key changes, particularly when it comes to Inheritance Tax (IHT). These updates will affect not just farmers but any business owners who were hoping to pass on their businesses without facing hefty IHT bills.

Let’s start with a quick refresher on the old rules:

  • Pensions: Most unused pension funds were excluded from IHT when the person passed away
  • Business Property Relief (BPR): BPR offered up to 100% relief on the value of business assets within your estate
  • Agricultural Property Relief (APR) – APR provided up to 100% relief on agricultural assets within your estate

So, what’s new? The recent budget brought in some significant changes that could impact your IHT planning:

  • BPR and APR: The 100% relief on business and agricultural assets will now be capped at £1 million. If the combined value of these assets exceeds £1 million, the relief drops to 50% on the excess
  • Pensions: From April 6, 2027, most unused pension funds and death benefits will be included in your estate for IHT purposes
How these changes affect you
To really highlight the impact of these changes, imagine a husband and wife with mirror Wills. Under the old rules, they could pass their trading business down to the next generation with little to no IHT. However, with the new rules, there’s a significant increase in the IHT due on the death of the second spouse.

 

Current  

IHT rules 

 

 

 

Future  

IHT rules 

 

 

 

 

1st Death 

 

2nd Death 

 

1st Death 

 

2nd Death 

Assets 

 

Husband 

Wife 

Wife 

Assets 

 

Husband 

Wife 

Wife 

 

£ 

£ 

£ 

 

£ 

£ 

£ 

Pension 

175,000 

175,000 

350,000 

Pension 

175,000 

175,000 

350,000 

Home 

500,000 

500,000 

1,000,000 

Home 

500,000 

500,000 

1,000,000 

Shares in BPR qualifying company 

1,250,000 

1,250,000 

 

Shares in BPR qualifying company 

1,250,000 

1,250,000 

2,500,000 

Pension outside 

of estate 

(175,000) 

(175,000) 

(350,000) 

 

 

 

 

Value of Estate 

1,750,000 

1,750,000 

3,500,000 

Value of Estate 

1,925,000 

1925,000 

3,850,000 

Less relief: 

 

 

 

Less relief: 

 

 

 

Spousal exemption 

(1,750,000) 

 

 

Spousal  

exemption 

(1,925,000) 

 

 

BPR (100%) 

 

 

(2,500,000) 

BPR (£1m x 100%, £1.5m x 

50%) 

 

 

(1,750,000) 

Less: 

 

 

 

Less: 

 

 

 

NI rate band (includes spousal transfer) 

 

 

(650,000) 

NI rate band (includes spousal transfer) 

 

 

(650,000) 

Value of estate subject to IHT 

0 

 

350,000 

Value of Estate subject to IHT 

0 

 

1,450,000 

IHT Due 

 

 

140,000 

IHT Due 

 

 

580,000 

What you should do next
The government is still consulting on these changes, with a final outcome expected by mid-2025. Once we have clarity on the legislation, we’ll know exactly what to expect.
In the meantime, if you’re worried about how these changes could affect your estate, it’s a good idea to seek advice on how to best plan for the future and potentially reduce the IHT burden. Contact us today for more information or guidance.
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