What do the Autumn Budget changes mean for inheritance tax planning?

The 2024 Autumn Budget saw a broad suite of changes to inheritance tax (IHT), forming part of the biggest tax-raising Budget since 1993. Strategies to manage inheritance tax already require a substantial amount of forward planning, and these new rules are likely to necessitate a detailed review for many people with a potential IHT liability.

Here, we’re looking at the details of these changes, and some considerations for navigating them effectively going forward.

The new inheritance tax rules explained

First, let’s review the key changes to inheritance that were announced in the Autumn Budget on 30 October 2024.

Defined contribution pensions liable for IHT

From April 2027, defined contribution (DC) pensions (and potentially some defined benefit pensions as well) will no longer be exempt from IHT. This could add a significant amount of additional IHT liability to estates who fall under the new rules.

For example, estates over the IHT thresholds with a DC pension balance of £1 million could be in line for an additional IHT bill of £400,000.

New caps introduced for business relief and agricultural relief

Agricultural property and business relief (BR) have previously benefitted from up to 100% relief. Assets that fall under these regimes include family farms and businesses, plus a range of investment products specifically created to take advantage of the exemption.

Under the new rules there will be an initial tax-free threshold of £1 million, with any amount above that being liable for IHT with a 50% relief. This creates an effective IHT rate of 20% for any amount over £1 million.

AIM shares also loses 100% exemption

This effective tax rate of 20% will also extend to Alternative Investment Market (AIM) which were previously exempt from IHT if held for at least two years at the time of death.

The notable difference between AIM shares and BR and agricultural relief is that AIM shares will not be eligible for the £1 million tax free threshold.

IHT threshold freeze extended to 2030

Finally, the current nil rate band of £325,000 and residence nil rate band of £175,000 will be frozen until 2030, an extension from the current plans for inflation-level increases from 2028.

Planning considerations under the new IHT rules

These are some significant changes that are likely to leave many concerned about how their beneficiaries will be able to manage their estates. This is particularly true for family farms or small businesses, who are now faced with the prospect of needing to come up with a large sum of money to avoid a forced sale.

However, there are still many planning options to help mitigate this risk. Ann-Marie Atkins, managing partner, financial planning at Bestinvest parent company Evelyn Partners says, “It will require a full review of the estate planning strategy for many clients. The most important thing is to start these conversations as early as possible. There are many options we can consider to help assets to be passed on efficiently, but the more time we have to implement these strategies, the more effective they’ll be. For example, some may want to consider gifting earlier than they had originally planned, with current health status being an important factor for the timing of these.”

Atkins highlights a number of specific areas to consider in an estate planning review in light of the Autumn Budget announcement.

Reconsider pension drawdown strategy and death benefits

Because of the pension exemption from IHT, many financial plans have revolved around using other assets to fund retirement expenses where possible. Drawing down on ISAs, cash savings and general investment accounts meant that a greater proportion of the estate would be left in IHT-exempt pension funds.

That strategy will need to be re-assessed, as will any death benefits held within pension schemes, which will also now fall under the new IHT rules.

Going forward, the order in which you take funds from investments and how these are spent will be key stages in the advice process, as will working affordability of any gifts you plan to make and making a decision on whether to insure against a potential IHT liability.

Ownership of AIM shares and BR investments

Investing in AIM-listed shares and into BR qualifying schemes has previously been a key IHT planning option for many investors. These schemes offered attractive IHT exemptions if held for two years and at the time of death, in addition to the potential for underlying investment returns.

With the tax benefits changing significantly, investors will need to weigh up the potential IHT benefits with the opportunity cost of alternative investment options. It’s particularly important given some of the other drawbacks which these investment types can have, such as limited control and access to funds.

As with any investment, these assets involve risk, their prices can go down and you may get back less than you invested.

Liquidity of businesses and farms for IHT

The BR and agricultural relief change is a bigger potential issue for family businesses and farms. Previously, owners could pass on these family businesses to their descendants without the need to fund an IHT liability.

This is particularly relevant for businesses and farms with large capital values but relatively low cashflow. For example, a farm with land and plant value of £5 million would previously have been able to be passed on to the next generation free of IHT. Now, the first £1 million will be exempt, but the remaining £4 million would attract IHT of £800,000.  

Coming up with this level of liquid assets to simply keep the family farm or business is likely to be an insurmountable hurdle, making early business succession planning more important than ever.

Update Wills to reflect new rules

Perhaps an obvious one, but many will want to review their current Will arrangements to ensure they’re still appropriate given the current rules. It’s important to note that most of these changes will not come into effect right away, so there is time to conduct a detailed review and create a new estate plan.

The right protection strategy is more important than ever

In some instances it’s not possible to completely eliminate a potential IHT liability through strategy alone. In those cases, a life insurance policy can be a valuable option to help fund the potential tax bill or cover potential tax on a large gift.

Atkins says, “Protection has always been one tool in the estate planning toolbox, but the Chancellor’s announcement has made it a far more important one. The key is to ensure that life policies are structured properly, because if they’re set up incorrectly, they can actually make an IHT problem worse rather than better.”

The importance of a measured approach

Despite the cascade of analysis and information off the back of this Budget, it’s important not to rush into any decisions. There is still around 18 months until many of the new rules come into effect, and there could be adjustments to the final legislation. A measured and methodical approach is the order of the day.

Speak to a Bestinvest Coach about your financial plan

There have been significant changes announced in the Autumn Budget, which could have implications for your financial future. That makes it a great time to speak to a professional about your situation, and at Bestinvest we have Coaches who can help for free.

Coaches do not provide personal financial advice. Coaching is not regulated by the Financial Conduct Authority.