Proposed Changes To Inheritance Tax In The UK: What You Need To Know

The rules around inheritance tax (IHT) are due to change. If you want to protect your wealth for future generations, it is important to be prepared. Making the right decisions now will impact what your loved ones have in the future.

In the autumn budget last year, the Chancellor announced that from 2027, the government would bring in new inheritance tax measures. The rules around pensions and certain reliefs and thresholds should therefore be changing. The government also said the nil-rate band will not change and will remain frozen until 2030. All of this will lead to higher inheritance tax charges.

It will impact many people, particularly those relying on pension wealth for inheritance planning, homeowners in the south east, and business owners.

Why do the proposed changes to IHT matter?

People often delay or avoid making plans around inheritance tax because they worry changing circumstances could make a difference. With the right advice you can ensure you’re making the right decisions, at the right time. Financial experts with sophisticated cash-flow modelling programmes can investigate all eventualities. Read on to make sure you know what you can do to act now and preserve your wealth.

What is expected to happen with IHT and pensions in 2027?

When a person passes away, the government charges inheritance tax on the person’s estate. This is calculated according to the assets they own when they die. Currently, pensions are not included in these calculations. From 2027, however, the government intends to change these rules. Some people use their pension funds as a way of passing on wealth tax free. The new legislation will mean higher IHT bills and less money to pass on.

The changes are still in the consultation process, so the details have not been finalised. However, acting now could make all the difference.

What changes are expected to come in for agricultural property relief (APR) and business property relief (BPR)?

From 6 April 2025, the government is extending the scope of agricultural property relief. Then, from 6 April 2026, the rates of these reliefs will be reduced. The 100% rate of relief will only apply to the first £1 million of combined agricultural and business property. Amounts above that will be treated at 50%. The business property relief rate for ‘shares designated as “not listed” on the markets of recognised stock exchanges’ will be reducing from 100% to 50%.

This will have implications for some business owners and will need to be planned for effectively.

What is the nil rate band freeze and what does it mean for homeowners?

The nil rate band (NRB) is the amount of an estate that is not subject to inheritance tax. It is currently £325,000 and has been frozen at this amount since 2009. Anything below this amount is free of IHT, anything above is typically taxed at 40%. In the autumn budget the government pledged to extend this freeze to 2030.

As house prices continue to rise, particularly in the south east, more and more homeowners will become liable for inheritance tax.

What can you do to reduce your inheritance tax liability?

Starting early and planning carefully will go a long way to helping you reduce your inheritance tax exposure. There are various ways you can make the most of your wealth, now and in the future. A qualified financial adviser will be able to discuss your specific circumstances with you. Advice will depend on many factors and these will all need to be taken into consideration. Every individual has a unique story. What you have and what you want to achieve varies: it is impossible to give any one-size-fits-all recommendations.

However, there are various strategies that can help reduce IHT. These include:

• Spending your money - It’s important to enjoy your wealth during your lifetime as well as preserving it for future generations.
• Gifting your wealth - There are ways in which you can pass on some of your wealth during your lifetime. This allows you to gift the people you care about with money, holidays, or property, for example, and see them enjoy it. It also means your estate will be worth less when the value is calculated, meaning lower inheritance tax costs. However, there are strict rules on the amounts and what you can and can’t gift.
• Insuring against potential tax liabilities - Life insurance can be used to cover potential tax liabilities. There are ways to do this by setting up a trust.
• Investing your money - You can invest your money in other assets. This also needs to be looked at very carefully as your investments may create new tax liabilities.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

The value of professional advice

A qualified and experienced Financial Adviser will be able to help you with the balancing act of spending and preserving your wealth. Trying to work these things out for yourself is difficult at the best of times. Given the complexity of all the rules and regulations, combined with the upcoming changes, professional advice is a must.

An expert Financial Adviser will create a strategy that is in line with your circumstances and what you wish to achieve. At Paula Bicknell Wealth we use financial modelling software that allows us to easily illustrate the impact different courses of action could have. We look at all the implications of each decision you could make. This gives you a deeper understanding and greater flexibility when you’re planning.

Are you proactively planning for IHT changes?

Maybe you haven’t thought about how to preserve your wealth, or how inheritance tax might impact your estate. It’s never too early or too late to start. With these upcoming changes, even if you have a solid plan in place, it might be time to take another look. As the changes to inheritance tax come in, more and more people are going to find they are impacted. Make sure you discuss this with your Financial Adviser at your annual review, if not before!

We’re based in Theale, Reading, but work with our clients throughout the country. We can meet you in person or online for an informal chat about how we could help. Make sure you are ahead of the IHT changes: contact us today.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.