Chancellor Rachel Reeves unveiled a sweeping series of inheritance tax (IHT) changes in the October budget that have shaken up the UK’s estate planning status quo. Following the consultation period that ended in January – whereby financial firms had the opportunity to share feedback on the practicality of the rule changes – we are yet to hear of any significant further changes.
In light of this we have addressed the key changes at present and how they could affect your financial future below.
Key inheritance tax changes
- Inclusion of Pensions in Estates: Markedly the most sweeping change from Reeves’ budget is the provision for pension funds to be included in the value of an estate for IHT purposes from April 2027. This removes a significant exemption that had long been a core component of many families’ inheritance tax strategies and will likely expose a much larger portion of the population to unforeseen taxes upon their death.
- Reforms to Business Relief (BR), Business Property Relief (BPR) and Agricultural Property Relief (APR): Starting April 2026, these reliefs will be less generous. Business relief on AIM stocks will be effectively halved, meaning a 20% IHT rate. For BPR and APR 100% relief will only apply to the first £1m of combined agricultural and business property, with the rate dropping to 50% thereafter.
- IHT Threshold Freeze: The IHT nil-rate band will remain at £325,000, and the residence nil-rate band at £175,000, until April 2030. By then IHT thresholds will have been frozen for 20 years, meaning more families are likely to be liable for IHT. The impact of this is compounded by rising values of properties and investments - soon to be joined by pensions – and will leave more families footing an unexpected bill.
Impact on your loved ones
One of the most pressing issues raised by the budget is the incorporation of pensions into the scope of IHT, which could lead to many more families facing cash flow issues upon their loved ones’ death. Previously IHT tax free, pensions were often seen as a readily accessible source of funds used to meet IHT obligations. The change poses a particular challenge for those who had utilised their pensions as a haven from IHT, alongside those with a significant portion of their estate tied up in pensions.
Further problems arise when passing wealth to children. This approach now runs the risk of double taxation, by both IHT and income tax, making the tax rate for some 67% (40% IHT and then additional rate income tax of 45%).
Arguably the greatest stressor stems from the requirement to pay death duties within 6 months. This is especially true given the probate process can be lengthy and accessing pension funds to pay the IHT bill may not be straightforward. This process may not just cause financial strain on your beneficiaries, but also emotional stress at a sensitive time.
Given the eminence of pensions in the pre- Reeve’s financial ecosystem and the impactful re-writing of their IHT exempt status, reviewing your pensions and your estate planning provisions have never been more pressing.
IHT tips and tricks
Despite the changes, there are estate planning strategies that remain valuable tools for managing your IHT position:
So what can you do?
If you’ve found yourself pondering your options, or perhaps what other people may do in your shoes, I’m afraid to say the answer is that one size does not fit all. Your circumstances, family dynamics, objectives and preferences are wholly unique to you.
Moreover, if the Chancellor’s changes remind us of anything it is that nothing is certain, especially tax legislation. Certainly, I have sought to ensure my clients’ IHT plans are well diversified to ensure any future changes do not undermine their positions, as it has done for many with their pensions this time around.
Therefore, whether one, or all the avenues, discussed may suit your needs is best ascertained through a thorough conversation with a professional, who will be able to advise you and perhaps utilise the aforementioned options to complement your financial plan. For my money, this is the surest way to achieve financial peace of mind.
How Quilter Cheviot can help you
At Quilter Cheviot, we appreciate that these changes may seem daunting. We also know that navigating the complexities of inheritance tax can be overwhelming. Rest assured; our team of expert advisors are here to guide you every step of the way.
We offer personalised estate planning services tailored to your unique needs to ensure your assets are protected and your loved ones are taken care of. With our deep expertise in gifting strategies - Business Relief, AIM investments, life cover, and trusts - we can help you craft a comprehensive plan that minimises your IHT liability and maximises your peace of mind.
Contact your local Financial Planning specialist for more information
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