Inheritance Tax (IHT) has proven a popular avenue for the Chancellor Rachel Reeves as she attempts to balance the Government’s books and there is growing belief that she could introduce further measures on IHT later this year.
The Chancellor is working amongst a backdrop of increased borrowing, slow economic growth and her Government’s own tight fiscal rules.
At this stage, changes to IHT remain speculative, but given the Chancellor’s previous reforms, the possibility of further changes cannot be ruled out.
What has the Chancellor already announced about Inheritance Tax?
There have been three significant proposed changes to IHT as the Government attempt to fill the financial gap without raising other tax rates.
The first was the extended freeze on the Inheritance Tax threshold rates and reliefs until 2030. Announced during last year’s Autumn Budget, the main nil-rate band figure will stay at £325,000 for at least the next five years, as will the associated residence nil-rate band.
In addition to this, Rachel Reeves also confirmed changes to the Agricultural Property Relief (APR) and Business Property Relief (BPR) in which the full 100 per cent relief from IHT will be restricted to the first £1 million of combined assets.
Introducing this, has meant more farmers and business owners will become liable to pay an Inheritance Tax Bill. Coming into effect from April 2026, unsurprisingly, this has cause outrage amongst farmers and business owners, potentially affecting long-term estate plans.
The most recent announced reform to Inheritance Tax was classing unused pension pots and death benefits as part of an individual’s estate which will come into effect from April 2027.
Including unused pension pots within an estate increases the value, pushing them closer or over the IHT threshold.
With a record £6.7 billion in Inheritance Tax collected by HM Revenue and Customs (HMRC) during the tax year 2022/23, this figure is expected to climb further as continued reforms are made and come into effect.
What other Inheritance Tax reforms could the Government explore?
Things are purely speculative at this stage as we won’t know what the Chancellor has planned until the Autumn Budget later this year.
One potential element of IHT that is being discussed is tightening rules on gifting money and assets and the potential introduction of a lifetime cap. The introduction of a lifetime cap would make more individuals liable.
Currently, gifts above the £3,000 per year gift allowance provided seven years before an individual’s death are not liable for Inheritance Tax while gifts between three and seven years are taxed on a scale with the rate reducing, the older the gift gets. This is known as taper relief.
Gifts within the three- and seven-year period are taxed within the taper relief, starting at 32 per cent before gradually decreasing to 8 per cent, with each year that passes.
However, should the Government decide to change this, a lifetime cap could be introduced as a way of limiting what individuals donate as part of their estate. The limits would include how much money is left as well as the value of assets.
The Government wants to stick to their manifesto and not increase taxes on workers. IHT reforms have proven useful to the Chancellor so far, but we won’t know if other reforms are on horizon until the Autumn Budget.
Concerned about Inheritance Tax?
Given the uncertainty around tax rates, it is natural to have some concerns especially when they could affect your long-term plans and wishes.
If you are concerned about IHT and how it affects your financial position, you should speak with financial experts who can advise and support you.
Financial experts can help you understand the current laws in place, advise how these could affect you and ensure you know your financial position and can prepare for further changes.
For all tax concerns and financial planning, get in touch with us for tailored advice and support.
