The UK government has unveiled significant changes to inheritance tax rules, slated for implementation in the coming years.
- Inheritance tax thresholds are set to be frozen until 2028, extending a cap on tax-free estate limits.
- Inherited pensions will fall under the scope of inheritance tax from April 2027, closing previous exemptions.
- Reforms will affect agricultural and business property reliefs, introducing a new tax regime for assets over £1 million.
- The government projects that these changes will increase inheritance tax revenue by over £2 billion.
The recent announcement by the UK government marks a decisive shift in how inheritance tax will be applied in the future. The most notable change involves bringing inherited pensions into the inheritance tax net starting from April 2027. This move aims to close a loophole that has allowed pensions to escape inheritance tax, particularly after the abolition of the lifetime allowance. As Chancellor Rachel Reeves stated, this adjustment will rectify imbalances introduced by previous policies.
Inheritance tax thresholds, which determine the amount of an estate that can be inherited tax-free, will remain at their current levels until 2028. This freeze will extend further until 2030, maintaining the threshold at £325,000, with potential increases based on specific circumstances like the transfer of a residence to direct descendants. Notably, for couples, the threshold rises significantly, enabling up to £1 million to be inherited tax-free under certain conditions.
Another significant aspect of the proposed changes is the reform of agricultural and business property relief, scheduled for April 2026. The new provisions will ensure that the first £1 million of combined business and agricultural assets remains exempt from inheritance tax. However, assets exceeding this value will now face inheritance tax with a 50% relief rate, effectively setting the tax at 20%. Despite these adjustments, the government assures that the interests of small family farms will largely remain protected.
The planned inclusion of pensions in the inheritance tax regime has drawn notable commentary from industry experts. Claire Trott expressed concern that this change could significantly increase the number of estates liable for inheritance tax, potentially affecting existing financial plans. Meanwhile, Steven Cameron highlighted the potential impact on retirement planning and the importance of public consultation to avoid unintended consequences.
Mike Ambery and Stevie Heafford further discussed the broader implications of these changes. Ambery pointed out that pensions, previously a strategic tool for estate planning due to their exempt status, will now add to the total value of an estate. This shift could lead to a reconsideration of how individuals manage retirement funds. Heafford emphasised that freezing the inheritance tax threshold rather than adjusting it for inflation could inadvertently widen the tax net, affecting more estates over time.
These comprehensive reforms to UK inheritance tax laws aim to address previous disparities, profoundly impacting financial and estate planning strategies.
