Budget inheritance tax moves less drastic than expected but many more families will pay IHT

In her Budget today, the Chancellor announced a number of measures around inheritance tax:

·       The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027.  

·       Agricultural property relief and business property relief: The government will reform these inheritance tax reliefs from 6 April 2026. In addition to existing nil-rate bands and exemptions, the current 100% rates of relief will continue for the first £1 million of combined agricultural and business property to help protect family businesses and farms. The rate of relief will be 50% thereafter, and in all circumstances for quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.  
 

·       Nil-rate band and residence nil-rate band: The inheritance tax nil-rate bands are already set at current levels until 5 April 2028 and will stay fixed at these levels for a further two years until 5 April 2030. The nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2 million. Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an inheritance tax liability. 
 

Ian Dyall, Head of Estate Planning at wealth management firm Evelyn Partners, says: 

‘The Budget has not wrangled with inheritance tax quite as much as had been expected.

‘There was no change to the nil-rate bands – but the freeze on those exemptions has been extended from 2028 to 2030 which will draw more families into IHT by the process of fiscal drag. This process will be accelerated by the inclusion of defined contribution pension pots in taxable estates, which will bring even more families into the IHT net. 

‘Currently only about 6% of estates are considered liable for IHT, but it can’t be long before this is 10%. 

‘The gifting rules escaped unchanged, but as expected there was a dilution of agricultural property and business relief which now share a combined threshold of £1million for 100% relief. While this is a less aggressive move than had been expected, it is still possible that modest family-owned and managed businesses could get caught up in measures intended to target the very wealthiest families. 

‘As for AIM shares, the fact that they were not ejected from business relief altogether has seen a relief rally of 4.4% in the AIM index today, which indicates that these investments will still have a role to play in estate planning. 

‘The major change as far as most families are concerned will be the inclusion of pension pots into the calculation of estates for IHT liability. This will change the estate planning wisdom for some retirees on how pension savings are used in retirement. 

‘This is because unspent pension savings are now more neutral compared to other assets from an IHT point of view so it is more likely that wealthy savers who have access to other savings will use more of their pensions during retirement.’