Inheritance Tax changes in the Autumn budget

As part of her tax reform package aimed at raising £40 billion, Chancellor Rachel Reeves has announced significant changes to inheritance tax (IHT). Here’s a breakdown of what inheritance tax is, the new changes, and how they could impact families across the UK.

What is Inheritance Tax (IHT)?

Inheritance tax is a tax levied on the estate of someone who has died, encompassing their property, money, and possessions. Although inheritance tax often sparks concern, only about 4% of families currently pay it, as the majority of estates fall below the taxable threshold.

Key features of inheritance tax include:

• Spousal Exemption: Estates left entirely to a spouse or civil partner are not subject to inheritance tax, regardless of value. This means that a £10 million estate left to a spouse would incur no inheritance tax.
• Threshold and Rate: Everyone has a tax-free threshold of £325,000. If the estate’s value exceeds this, a 40% tax rate applies to the excess amount.

What are the Autumn Inheritance Tax Changes?

The Chancellor described the reform as “a balanced approach,” focusing on adjustments to thresholds, pensions, agricultural property relief, and business relief. Below are the major changes:

1. Extension of the current Inheritance Tax threshold
   The £325,000 inheritance tax-free threshold will now remain in place until 2030. This extension provides clarity for families planning their estates, as any amount over this threshold will continue to be taxed at 40%.
   
2. Inherited pensions will be subject to Inheritance Tax
   One of the most impactful changes involves inherited pensions. Beginning in April 2027, inherited pensions will be subject to inheritance tax. This change closes what the Chancellor called a “loophole” created after the lifetime allowance was abolished.
3. New rules on agricultural property and business relief
   Starting April 2026, adjustments to agricultural property and business relief will also take effect. Here’s how these updates will work:
   
   
   1. The first £1 Million remains exempt: Families can still pass on up to £1 million in combined agricultural and business assets without paying inheritance tax.
   2. New Tax rate for assets over £1 Million: For agricultural or business assets valued above £1 million, a 50% relief rate will apply, meaning these assets will face an effective tax rate of 20% on the excess.

These changes aim to protect small family farms, with an estimated three-quarters of claims expected to remain unaffected.

What do the Inheritance Tax changes mean for families and estate planning

Lucy Roughley, Legal Adviser at Pearson Solicitors and Financial Advisers said:

“For families, these inheritance tax adjustments present both opportunities and challenges. Here are some ways these updates may impact estate planning:

• Families with Pensions: If your estate includes a pension you plan to pass down, it will be crucial to adjust estate planning accordingly ahead of April 2027, when pensions become taxable under IHT.
• Agricultural and Business Asset Owners: Families holding agricultural or business assets should take note of the new relief caps. This change underscores the importance of working with estate planners to ensure any excess assets are managed efficiently.
• General Estate Planning: With the £325,000 threshold extended through 2030, individuals have a clearer planning window to make strategic decisions about how best to transfer wealth, especially as the exact rules after 2030 remain uncertain.”

Inheritance tax can be complex, but proactive planning can ensure your family maximises available exemptions and reliefs. Chancellor Reeves’ changes are designed to raise revenue while protecting small estates, particularly those involving family farms or businesses.

By understanding these changes and adjusting estate plans accordingly, families can continue to build financial security across generations despite evolving tax regulations.

How can we help?

If you’re concerned about the new inheritance tax changes, our private client solicitors can help you navigate these and ensure your loved ones receive the maximum inheritance possible. Contact our experts on 0161 785 3500 or email enquiries@pearsonlegal.co.uk

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.