Autumn Budget 2024 - Inheritance Tax

The Government intends to bring "most unused pension funds and death benefits" into an individual's estate for IHT purposes, from 6 April 2027.  The details are subject to a consultation, which closes on 22 January 2025.  

Funds paid from registered pension schemes are currently outside a person's estate, and so not subject to IHT, so long as the recipient(s) is chosen at the discretion of the trustees or managers.  Commonly, members can nominate their preferred recipient/s but this is not binding on the trustees/managers.  For schemes where the nomination is binding, however, the death benefit is within the individual's estate and so is subject to IHT (depending on the value of the estate and whether payment is to the spouse or civil partner or not).  The Government proposes to remove the distinction so that all pension funds fall within the member's estate and are potentially subject to IHT.  

The Government's concern here is that defined contribution (DC) pensions are being used by some people for passing on capital sums outside of the IHT regime.  But this is not just about DC pension pots: some defined benefit lump sums will also be in scope (for example 5- or 10-year pension guarantees).  It could also catch some lump sum death-in-service benefits but the consultation is not clear on this: it says that benefits payable under life policies will not be caught by the changes

Pension schemes and providers will be liable to pay any IHT due.  They will be concerned about the complicated processes they will need to undertake in order to establish their IHT liability, including apportionment between themselves and the estate, and about the potential for delays to payments of benefits and the liability for interest on IHT paid more than six months after the death.

In some scenarios, including in particular on death after reaching age 75, there is potential for income tax to be payable on the residual benefit payable after any IHT due has been deducted.

Currently, it is possible to benefit from up to 100% relief from inheritance tax on qualifying business assets and agricultural assets where business property relief ("BPR") and agricultural property relief ("APR") apply. Notably, companies listed on growth markets (including AIM) benefit from special treatment which allows their shares to qualify for BPR.

From 6 April 2026, the 100% rate of relief will continue to apply for the first £1m of combined agricultural and business property but will be reduced to 50% on the value above the £1m threshold.

The rate of BPR available for shares listed on growth markets such as AIM will also be reduced from 100% to 50% in all circumstances from April 2026. This will not be a welcome development for those who warned that restricting BPR could lead to the collapse of the AIM market. Whether or not this concern bears out remains to be seen, with the FTSE AIM 100 Index seeing a c.4% increase on Budget Day following the announcement.  However, given that BPR incentivises investment in AIM listed companies, it is reasonable to expect that there could be some behavioural change from investors in AIM listed companies as a result of these reforms.

Though the Government claims that almost three-quarters of estates claiming APR and the majority of those claiming BPR in 2026-2027 will be unaffected by these changes, clearly some estates will be significantly impacted.  The Government is predicted to raise £0.5 billion per year from the reforms to APR and BPR by 2029-30.  This figure does factor in expected behavioural changes, but clearly estimating the effect of new IHT planning will be hard to measure accurately. 

Finally, whilst the rates of APR are set to reduce from April 2026, the government has simultaneously confirmed that it will extend the scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or approved responsible bodies. The relevant legislation is expected to be set out in the Finance Bill 2024-2025.

The proposed change from the current domicile-based system of IHT to a new residence-based system was first announced by the previous Government earlier this year. The new Labour Government subsequently provided confirmation over the summer that the change would be going ahead, but with scant details provided.  We now have the detail, including draft legislation. 

In summary, the key changes for individuals are as follows:

• There should be no impact on UK assets and property, which will remain in scope for IHT (as is currently the case).  The change will affect non-UK assets and property held by individuals and trusts.
  
  
• The new test for whether non-UK assets are in scope for IHT will be whether an individual is a "long-term UK resident".  Domicile will no longer have any relevance.
  
  
• An individual is "long-term UK resident" if they have been UK resident for at least 10 out of the last 20 tax years, and they remain in scope for between 3 and 10 years after leaving the UK (depending on how long they were UK resident prior to leaving the UK).  This is an improvement from the flat 10 year "tail" that was announced over the Summer.

There is more complexity in respect of the proposed changes for trusts and settlements, which we will not be exploring in this summary. Currently, non-UK assets comprised in a settlement or trust are excluded property if the settlor was non-domiciled at the time the assets became comprised in the settlement.  This is changing. From 6 April 2025, non-UK assets will only be excluded property at times when the settlor is not a long-term UK resident.  Special rules will apply for "qualifying interest in possession" (QIPP) settlements and relevant property settlements. 

Whilst there are some limited transitional provisions for certain specific categories or circumstances there are no general grandfathering provisions, which will come as a disappointment to affected individuals.

Click for an update on the other proposed changes for non-doms.    

The Chancellor announced that the freeze on the nil-rate band and residence nil-rate band (currently in place until 5 April 2028) will be extended for a further two years until 5 April 2030. It was also confirmed that the current reduction of the residence nil-rate band for estates valued at more than £2m will continue to apply for every £2 over the £2m limit.

This two-year extension is expected to raise £0.4 billion by 2029-30 according to the OBR.