No longer is the default advice to leave all assets to a spouse or to maximise pension contributions. In this article we detail the biggest announced changes and consider some implications.
PENSIONS
What’s changing?
Undrawn pensions are currently exempt from IHT. From April 2027 that is set to change when pensions become fully chargeable assets.
What are the implications?
Many people will have been making pension contributions over the years to maximise their pension pots, on the assumption that the funds would be protected from IHT. There is now no IHT benefit in retaining funds in a pension until death, or in making pension contributions to reduce the value of your estate, though there are many other reasons to contribute to a pension.
The purpose of a pension is to provide an income during retirement. If utilised in this way there should be little or no funds remaining at death, which will mitigate exposure to IHT. However, for those using a pension to shelter assets from IHT, it may be worth planning now for the change. This could include considering whether to draw down pension funds to spend or give away. Depending on the size of the pension, there could be a benefit in doing this if the individual is over 75 and does not need the money, as otherwise the undrawn pension could be subject to double taxation – IHT on death and income tax on the beneficiary when drawn down.
The detail of the proposals may change between now and April 2027 so watch this space.
BUSINESS PROPERTY RELIEF AND AGRICULTURAL PROPERTY RELIEF
What’s changing?
Assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR) are currently exempt from IHT and there is no limit to the value that qualifies. From April 2026, there will be a combined £1M exemption for BPR and APR. Values above £1M will be taxed at an effective rate of 20%.
What are the implications?
The changes will impact business owners and farmers. Holding onto assets that qualify for BPR and APR until death will not necessarily be the best advice. There may now be merit in passing on these assets much sooner, though anyone considering doing so should be mindful of the capital gains tax implications.
The £1M exemption is per estate/individual and any unused allowance cannot be transferred. This means that leaving everything (including BPR and APR qualifying assets) to a spouse/civil partner would risk losing the benefit of the £1M exemption. It will be important for individuals to update their Will to ensure the exemption is not lost.
It is still possible that following the loudly-voiced objections, the Government may reconsider the changes to BPR and APR. A consultation is expected to be published next year with further details of the intended changes.
OTHER CHANGES
Other changes announced include extending the freeze on the nil rate band (£325,000) and main residence nil rate band (£175,000) at current levels until 2030. This will bring more estates into the charge to IHT.
BPR on AIM shares will be reduced from 100% to 50% meaning an effective IHT rate of 20% from April 2026. AIM shares will not qualify for the £1M exemption.
Anyone that may be impacted by the IHT changes in the budget should seek professional advice sooner rather than later to consider tax planning options and possible revisions to their Will.
If you have any queries and would like assistance please contact Dafydd Ford on 01633 653166 or email Dafydd.Ford@kilsbywilliams.com. Alternatively, please contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
