Inheritance tax changes in the Autumn UK Budget: what we know so far

Among the changes in Rachel Reeves's much anticipated Autumn UK budget, there are some very considerable revisions to inheritance tax ('IHT'). The fundamentals are staying the same, but there are very significant changes to the IHT payable on businesses, business assets, agricultural property, and pensions. The Chancellor also provided some more detail on the long-mooted shift from a domicile-based system for determining whether a person falls into the UK IHT net, to a residence-based system.

What's staying the same?

The rules on 'basic' inheritance tax remain. The nil rate band ('NRB') and residence nil rate band ('RNRB') remain frozen at £325,000 and £175,000 respectively until 5 April 2030. The RNRB will continue to taper for estates exceeding £2m. The death rate stays at 40% and the lifetime rate at 20%. The net effect of this is that a married couple who own their own home and leave it to their children on the second death can still leave up to £1m of assets to the next generation IHT-free.

What's changing?

However, it is clear that there are going to be some material changes to the current IHT landscape.

1. Agricultural and Business Property Relief

From April 2026, the IHT landscape for owners of businesses and agricultural assets will entirely change. If assets currently qualify for agricultural property relief (APR) or business property relief (BPR) at 100%, the first £1m will still be tax free. The balance of assets, however, will only benefit from half of the relief, meaning an effective death tax rate of 20% on the value of qualifying assets exceeding the £1m threshold.

Where the assets in question are shares listed on AIM, the alternative investment market, and which currently benefit from relief, the £1m threshold will not apply and the whole value will be taxed at 20%.

Lifetime gifts of APR or BPR qualifying assets made on or after 30 October 2024 will fall into the new charging regime if the donor dies on or after 6 April 2026. However, it would appear that lifetime gifts that were made before Budget Day may still be taxed under the old regime even if the donor dies after the new regime has come into effect.

The NRB and RNRB will continue to apply to estates that are affected by these provisions, as will other exemptions including tax-free transfers between spouses and civil partners. Importantly, however, the £1m allowance will not be transferrable between spouses and civil partners so will apply to individual estates only.

The government will publish a consultation in early 2025 on the application of the new rules to trusts, including gifts into trust and the ongoing periodic and exit charges that currently apply to trust property. Details are scarce at the moment, but it appears that there may be a distinction made between trusts that existed before Budget Day (which will each have a £1m allowance for APR and BPR property) and trusts that are set up on or after Budget Day (where the £1m allowance will be shared between trusts that are created by the same person).

These changes will have an enormous impact on individuals, partnerships and trusts that own trading businesses, farms and landed estates. Plans will need to be made to cover significant tax on death, certain asset transfers and during the lifetime of trusts where previously no tax would have been due. Existing succession and estate plans and structures will need to be revisited and adjusted in light of the new rules.

2. Pensions

From April 2027, the unused funds in, and most death benefits payable from, registered pension schemes will be subject to IHT upon the death of a scheme member.

It is important to stress that no draft legislation is yet available in this area. However, it is suggested in the government's consultation paper that the deceased individual's applicable NRB allowance will be apportioned between the deceased's pension assets and non-pension assets which are treated as part of the 'IHT estate'. This includes trust funds in which the deceased had a qualifying interest in possession.

The apportionment of the NRB will be made based on the values that each of the different pension and non-pension funds bear to one another.

Where the pension funds exceed the value of the NRB allowance available for application to them, IHT will be charged at 40% on the surplus.

The government's consultation paper suggests that Pension Schemes Administrators (PSAs) will be responsible for reporting and paying the IHT due on the pension funds. The deceased's personal representatives (PRs) will remain responsible for submitting the overarching IHT account in the estate, and paying IHT due on other funds for which they are liable. A key point is that IHT due on the non-pension assets will not be able to be calculated accurately without reference to the exact value of the pension funds, and vice versa. Reporting and payment of the IHT due by both the PSAs and PRs will therefore only be possible following the parties liaising with one another. There will be several steps to this, a framework for which is outlined within the government's consultation paper.

This will inevitably increase the administrative work and cost incurred in estate administrations. The IHT due for settlement by PSAs and PRs must be paid within six months following the month of death of the member, before interest will begin to run on the outstanding balance (the rate of which has also significantly increased as a result of the Budget).

3. Domicile

From April 2025, the concept of 'domicile' will be removed from the IHT regime and the question on whether or not non-UK assets will be subject to IHT will depend on whether a taxpayer was UK resident on death.

UK assets have always been in scope for IHT (subject to applicable exemptions / reliefs), regardless of a taxpayer's residence on death, and that will not change. However, subject to transitional rules, where a taxpayer dies owning non-UK assets, those assets may fall within the IHT net where the taxpayer has been resident in the UK for at least 10 of the last 20 tax years (they become a 'Long Term Resident' (LTR)) immediately before the tax year in which they die.

Where a LTR decides to become non-UK resident and does not return to the UK prior to their death, non-UK assets will remain in scope for IHT depending on how long the taxpayer was actually resident in the UK between 10 and 19 of the last 20 years: those UK resident for between 10 and 13 years will continue to be subject to IHT on non-UK assets for a further 3 years, and that will increase by one tax year for each additional year of UK residence. Where a LTR leaves the UK and remains non-UK resident for 10 consecutive years, they will not be treated as a LTR on returning to the UK after that period i.e., the 'clock' will be reset for IHT purposes on their return to the UK.

These changes will have particular consequences for what are known as 'Excluded Property Trusts'. From April 2025, where the settlor of such a trust becomes a LTR, and remains so on death, the assets held in trust will be within the scope of IHT regardless of the assets having been settled on trust before the taxpayer became a LTR.

Conclusion

The changes described above do represent a significant change to the UK's approach to IHT. The detail of the changes will be detailed in draft legislation which may be subject to change before implementation. We will be monitoring developments in the lead up to the changes coming into force. If you are concerned about how these changes affect you or would like to discuss matters, please contact your usual Brodies contact or anyone in our Personal team.