Inheritance tax in the Autumn Budget – navigate the changes with financial planning!
- TBA
- Dec 4, 2024
- 3 min read
Updated: Feb 25
Have you reviewed how the latest Autumn Budget could affect you?
Touted as one of the largest tax-increase budget in UK history, its contents include:
An increased minimum wage
Changes to income tax and National Insurance
State pension increases
Stamp duty increases on second homes
Capital gains tax hike
Inheritance tax reform
Business rate relief & abolishment of the Non-Domicile tax status
VAT exemption removed for private schools
A key revenue source for the government
Recently, the Environment Minister Steve Reed criticized the previous Conservative government, stating it ‘deliberately obscured’ the true state of public finances, leaving a ‘£20 billion gap’ which effectively justified future tax increases.
Inheritance tax therefore emerged as a major focus for revenue generation. The Autumn Budget confirms that from 6 April 2027, unclaimed pension funds and death benefits will be included in the inheritance tax base. This means pensions are no longer a tax-efficient tool for transferring wealth to the next generation.
Additionally, the inheritance tax threshold, initially set to expire in 2028, will be extended to 2030, allowing up to £325,000 to be inherited tax-free. This rises to £500,000 if the estate includes a family home passed to direct descendants and up to £1 million if passed to a surviving spouse or partner.
However, starting in April 2026, agricultural and business asset relief is capped at £1 million.
Any excess will receive a 50% tax exemption, resulting in a 20% inheritance tax on applicable assets beyond the threshold. Meanwhile, stocks in alternative investment markets will qualify for a 50% inheritance tax reduction, with an effective tax rate of 20%.
Overall, these changes aim to raise over £2 billion by the end of the forecast period.
Minimising your inheritance tax bill
Though inheritance tax may seem unavoidable, residents can take advantage of certain policies to reduce it:
Gift Giving: Gifts made at least seven years before death are tax-free. An annual exemption allows tax-free gifts up to £3,000, and smaller gifts of up to £250 can be given without additional allowances. You can also carry over any unused annual tax-free allowance to the next tax year—but only for one tax year. If you are attending a wedding, you can gift up to £1,000 without worrying about inheritance tax (IHT). You can give more to relatives—up to £2,500 to grandchildren and up to £5,000 to children. To qualify as an IHT-exempt gift, the gift must be made before the wedding, and the wedding must take place. Otherwise, the gift will be considered a potentially exempt transfer.
Charity Donations: Leaving donations to UK-registered charities exempts them from inheritance tax. If more than 10% of the taxable estate is donated, the inheritance tax rate drops from 40% to 36%.
Leave to Spouse or Partner: Transfers to spouses or civil partners are tax-free, regardless of amount. Unused allowances can be transferred, resulting in a combined allowance of up to £1 million.
Property Allowance: Passing a residence to children or grandchildren allows an additional £175,000 exemption.
Equity Release: Options such as lifetime mortgages or home reversion plans can reduce estate value. However, care is needed with lifetime mortgages due to accumulating interest.
Insurance: Policies can cover inheritance tax liabilities.
Trusts: Placing assets in trusts can control how assets are distributed, potentially reducing inheritance tax.
Inheritance tax and pension policies directly impact financial planning, and consulting with a tax expert can offer more tailored advice to suit your needs.
