On the 30th October 2024, Rachel Reeves, Chancellor of the Exchequer, delivered the Labour governments’ first budget. There is a variety of changes outlined which aims to raise public spending and government borrowing. One other proposition aims to make changes to taxes, that are projected to generate an additional £40 billion in revenue for the UK.
One area of the budget that is changing is Inheritance Tax, which is payable on estates over £325,000. Erin Clarke, Solicitor in the Private Client Team, explores these changes in the new government budget and what that could mean for you.
Nil Rate Band frozen
At the time of a person’s death, they can possess up to £325,000 worth of assets before being subjected to inheritance tax.
This threshold has remained unchanged since 2011, and the government has pledged to maintain this threshold until 2030.
If these assets include a property that is left to children or grandchildren, the estate then qualifies for the residence nil rate band, this is an additional tax-free allowance that shall also remain frozen at £175,000.
In April 2010, the average property price was £170,028, however, as of April 2024 this has now risen to £281,331.
This means the downside to the government freezing the nil rate bands could result in more people owing inheritance tax, compared to fifteen years ago.
Pensions
Up until now, most pensions have been excluded from a person’s estate when calculating inheritance tax. This exclusion allows individuals to save money in pension schemes and designate a beneficiary for their pension without incurring inheritance tax.
The government is proposing that as of April 2027, money held in pensions should be included in the calculation of inheritance tax. With the only exceptions being defined benefit schemes, such as public sector pensions, teacher’s pensions, and annuities.
Assets can be transferred to a spouse upon death without inheritance tax due to a spousal exemption, this also applies to pensions.
This proposal is still at the consultation stage and the legislation has not yet been finalised but could mean that more estates will be liable for inheritance tax.
Business property relief and Agricultural relief
From April 2026, there will be a single threshold relating to business and agricultural assets. This means that the first £1m of these sorts of assets will receive a 100% tax relief from inheritance tax, any subsequent assets over £1m will be taxed at an effective rate of 20%.
Business shares that are not quoted on a recognised stock exchange, which includes AIM shares, will not benefit from the £1m threshold for business and agricultural relief, and will be subject to inheritance tax at an effective rate of 20%.
How does this affect you?
The overall effect of the changes to inheritance tax is that more people will be required to pay inheritance tax upon death. It is therefore more important than ever to seek expert advice when drafting your Will to ensure all allowances and exemptions are maximised.
In the event of a loved one passing away, it is best to speak to a legal representative who specialises in probate as they will be able to help guide and support you through the changes to the laws and ensure all tax implications are properly dealt with.
At Bromleys, our legal experts have extensive experience assisting individuals in estate planning and what inheritance tax could mean for you. Call us today on 0161 768 1596 or email bromleys@bromleys.co.uk.