In our previous article, Preparing for the Autumn Budget: Possible Changes to Inheritance Tax and What They Mean for our client and our Associates. We explored potential shifts in the UK tax landscape, particularly around Inheritance Tax (IHT). Anticipating the government’s need to tackle a substantial fiscal shortfall which was referred to as a ‘blackhole’, we speculated that the Chancellor, Rachel Reeves, might make tough decisions impacting IHT reliefs, rates, and exemptions. Now, with the Budget announcements confirmed, it’s clear that many of the anticipated changes have materialised, bringing significant implications for estate planning and wealth management.
It’s important to note that we’re not tax advisers, we’re an estate planning firm and act as a back office for lots of estate planning businesses so this article is merely what we’ve seen come out of the budget, and not tax advice.
Major IHT Changes: Meeting the Fiscal Deficit
As expected, IHT emerged as a focal point for addressing the public finances deficit. Reeves’ announcements reflect a pragmatic approach to increasing revenue, with the freeze on the IHT threshold extended until 2030 and a major reform to reliefs for business, agricultural property, and inherited pensions. Here’s what she said:
- Extension of the Nil-Rate Band Freeze Until 2030
We previously highlighted the possibility of the IHT nil-rate band remaining fixed at £325,000, and this freeze has indeed been extended until 2030. While this has maintained the threshold at a long-standing level, rising property values mean that more estates will inevitably be pushed into the IHT bracket due to what’s known as fiscal drag. Estates that may have previously been tax-exempt will now face a higher likelihood of crossing the tax threshold, with the standard 40 per cent rate applied to values exceeding £325,000. We previously noted that only 4% of estates are currently subject to IHT. We expect this to rise.
For clients, this may call for more regular reviews of Wills and estate plans to ensure they remain aligned with their financial goals amidst increased tax exposure.
- Introduction of IHT on Inherited Pensions
During our pre-Budget analysis, we pointed to the potential inclusion of pensions within the IHT scope, a change that has now been confirmed. Starting from April 2027, inherited pensions will be subject to IHT. This reform is expected to generate substantial revenue by closing a perceived loophole where pension assets could previously be passed to beneficiaries free from IHT. Reeves described the change as a necessary step to curb pension-based tax avoidance strategies, as some high-net-worth individuals have increasingly used pensions as estate planning vehicles.
- Reforms to Business and Agricultural Property Relief
Rachel Reeves also confirmed that Business Property Relief (BPR) and Agricultural Property Relief (APR) would be reformed from April 2026. Under the new rules, only the first £1 million of combined business and agricultural assets will remain exempt from IHT, with assets above this threshold now subject to a 20 per cent effective tax rate, albeit with a 50 per cent relief.
These changes, aimed at high-value estates, attempt to balance fiscal needs while providing continuity for small family farms and businesses. As we noted, many business owners and farmers depend on these reliefs to transfer assets without the need to sell. The reforms underscore the importance of proactive planning for high-net-worth individuals and family business owners, who should consider diversifying assets or using trust structures to manage new tax liabilities.
- Reduced IHT Relief on AIM Shares
Reeves’ reform package includes a reduction in IHT relief for AIM-listed shares, which now only receive 50 per cent relief instead of full exemption.
Addressing Anticipated Impacts on Estate Planning
The pre-Budget outlook focused on potential adjustments to exemptions and reliefs, and now that these have been confirmed, several key steps are essential to advise clients effectively:
– Updating Estate Plans and Wills: With the new restrictions on IHT reliefs and the inclusion of pensions in the IHT net, it’s critical to review clients’ existing Wills and estate plans to ensure they align with the revised landscape. This should be monitored regularly. We ordinarily advise monitoring this every 3 to 5 years.
– Advising on Lifetime Gifting: Lifetime gifting remains a viable tool for reducing estate size ahead of IHT thresholds. However, with higher taxes on legacy assets, clients should also consider the timing and structure of gifts in a way that optimises the IHT implications over the long term.
– Exploring Trusts and Alternative Strategies: With changes to agricultural and business property reliefs, trusts can be a practical alternative for protecting family businesses and high-value agricultural assets. Setting up family trusts may allow for efficient intergenerational transfers, keeping wealth within the family while adapting to the tightened tax rules. Remember that this is an incredibly complex area of law and advice should be sought.
Looking Forward: Staying Informed and Proactive
As we anticipated, the Budget was indeed about “Fixing the Foundations,” aiming to address the UK’s fiscal gap while adjusting the tax landscape in a measured way. With Reeves’ IHT reforms set to raise billions in revenue, estate planning strategies will need to evolve. Staying informed and proactive is key for Prestige Legal Services Associates as they advise clients on these changes.
Should you have any questions, feel free to contact us.