Inheritance tax is a tax paid on the estate of a deceased person. The amount of inheritance tax that will be paid depends on the value of the person’s estate, which includes the property, money and other assets left by the person who has passed away.
The latest UK budget has brought significant changes to inheritance tax, raising the question of who will be affected. The changes announced will significantly impact estate planning as more families will find themselves in the inheritance tax net.
In this blog, we take a closer look at what’s changing, what it could mean for your finances and why it is more essential than ever for you should put a financial plan in place so that you have peace of mind knowing your loved ones will be looked after when you die.
1. Families with modest estates
The biggest change is the freeze on the inheritance tax threshold (currently £325,000, rising to £500,000 if a person leaves their home to their children) for another two years, from 2028 to 2030. This change will disproportionately affect middle-income families.
Rising property prices and inflation will push more estates over the threshold and leave beneficiaries with higher inheritance tax bills. Wealthier estates will also be impacted by changes to agricultural and business relief, especially where asset portfolios exceed £1 million.
2. Farmers
The reforms to agricultural and business property relief will directly impact individuals with substantial assets tied up in family businesses or agricultural land:
- The cap of 100% relief on the first £1 million of combined agricultural and business assets will mean estates with larger asset values will now pay tax on anything exceeding this threshold.
- The reduction of relief on Alternative Investment Market (AIM) shares from 100% to 50% will affect business owners and investors relying on AIM-listed shares as part of their estate planning.
This could result in family-run businesses or farms being partially sold to cover tax liabilities, creating additional financial and emotional strain.
3. Pension savers
Perhaps one of the most significant changes announced in the Autumn Budget was the plan to bring unused pension funds into the scope of inheritance tax from April 2027. Many people have relied on pension funds as a tax-efficient way to pass wealth to future generations.
This change will primarily affect those with significant pension savings, especially individuals who plan to use their pensions as a means to reduce overall IHT liabilities.
How can families prepare?
While the changes to inheritance tax bring challenges, there are steps you can take to reduce the impact, including:
- Review wills and estate plans: Ensure your estate is structured to take full advantage of exemptions and reliefs, such as the residence nil-rate band.
- Utilise gifting strategies: Gifting assets during your lifetime can reduce the taxable value of your estate, provided you live for seven years after the gift.
- Consider trusts: Placing assets into a trust can help shield them from inheritance tax, though this requires careful planning.
How Hughes Probate Services can help
At Hughes Probate Services, we recognise that it is more vital than ever to ensure that you are as in control of your future as possible. Creating a Lasting Powers of Attorney reviewing or making sure you have a Will are both vital parts of future planning that you should not ignore.
Whether you’re looking for advice on Lasting Powers of Attorney, or want to revisit or create your Will, Hughes Probate Services can provide friendly and expert guidance to help you understand the process and the steps you need to take.
If a loved one has recently died, you might be facing probate – the legal and financial process of administering a person’s estate when they have died. Julie at Hughes Probate Services is here to walk you through the probate process step-by-step. Please get in touch with Julie and we can arrange an informal chat over the phone or cuppa.