31 October 2024
Autumn Budget 2024
By Kieran Athow, Associate Solicitor.
Rachel Reeves, Chancellor of the Exchequer, outlined the Labour government’s spending plans, tax changes and economic forecasts yesterday afternoon – known as the ‘Autumn Budget’.
The changes announced were wide ranging, although this article only summarises several changes relating to Inheritance Tax. Rachel Reeves noted that when considering such changes, they have taken a “balanced approach” and acknowledge the sensitive issue of individuals wishing to leave more of their estates to their descendants. The government believe that the changes will make the Inheritance Tax system fairer by ensuring that the wealthy estates contribute to public finances to a larger degree.
The announced changes to Inheritance Tax include: –
1. Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”)
Current Position
Where the pre-conditions of APR are met, the agricultural value of property subject to either a lifetime gift or forming part of an individual’s estate on death may qualify for relief from Inheritance Tax of 100%. This is subject to several exceptions including if the agricultural property is subject to a tenancy which commenced before 1st September 1995, in which case the relief may be restricted to 50%.
Where the pre-conditions of BPR are met, the value of certain shareholdings, interests in businesses and land/assets owned by an individual personally which are used wholly or mainly for the purposes of their business may qualify for relief at a rate of either 50% or 100%, depending on the nature of the asset/interest in question.
APR and BPR can reduce the risk of Inheritance Tax charges resulting in the break up of a viable business in a succession situation.
Outlined Changes
With effect from 6th April 2026, the higher rate of 100% relief in respect of APR and BPR on all qualifying assets will be restricted to the first £1,000,000, with any excess value thereafter qualifying for a reduced rate of relief of 50%.
Further, any shares which are not listed on the markets of recognised stock exchanges (e.g. including shares listed on the ‘Alternative Investment Market’) will no longer qualify for BPR at the full rate of 100% and, instead, the rate of relief shall be reduced to 50% for qualifying shares.
2. Pensions
Current Position
Currently, un-used pension funds and any lump sum death benefits following an individual’s death are typically considered outside of their estate for Inheritance Tax purposes if the pension provider retains discretion over the payment and recipients of such sums. Individuals would typically submit an ‘expression of wish’ (or similar) form to the pension provider therein detailing their wishes as to the intended beneficiaries following their deaths. There are several exceptions to this, including if a pension permits you to make a binding nomination of payment and, in such case, any un-used funds or lump sum benefits payable may in fact be considered part of the individual’s taxable estate for Inheritance Tax purposes on their death.
Outlined Changes
With effect from 6th April 2027, un-used pension funds and lump sum death benefits will be considered part of an individual’s estate for Inheritance Tax purposes.
This is considered by some to be one of the most significant changes, given that pensions have been widely used as a vehicle to transfer wealth (free of Inheritance Tax); what Rachel Reeves referred to as a “loophole” in relation to inherited pensions.
3. Standard and Additional Residence Nil-Rate Band Allowances
Current Position
Currently, the standard Nil-Rate Band allowance is up to £325,000 for Inheritance Tax purposes. This means that the first £325,000 of an individual’s chargeable net estate on death could be free of Inheritance Tax. The available allowance is dependent on several factors and could be reduced by the value of any gifts made by an individual during the 7 years (or up to 14 years if the gift is made into Trust) prior to their death, although this aspect is outside the scope of this article.
The additional residence Nil-Rate Band allowance is currently up to £175,000, which is typically available to a deceased’s estate in the event that their interest in a property, which was their primary residence, is ‘closely inherited’ by their ‘lineal descendants’ (i.e. including children/grandchildren and step-children/grandchildren) following their deaths.
It is also possible for a surviving spouse to transfer the un-used percentage of their late spouse’s un-used standard and additional residence nil-rate band allowances to their estate following the second spouse’s death, thereby bringing the total cumulative standard Nil-Rate Band allowance to up to £650,000 and the additional residence Nil-Rate Band allowance to up to £350,000 in such scenario (i.e. combined to up to £1,000,000).
Outlined Changes
The Labour government have confirmed that the said allowances will remain frozen until 5th April 2030, which is two years further than the freeze set out by the previous Conservative government.
The tapering limit in relation to the Residence Nil-Rate Band allowance will continue to start from £2,000,000.
4. The Concept of ‘Domicile’ in relation to Inheritance Tax
Current Position
The concept of ‘domicile’ is a UK common law principle which has a meaning beyond the typical dictionary definition of ‘place of residence’. It can sometimes be considered an individual’s ‘permanent home’, although it is not necessarily linked to physical residence or an individual’s nationality. An individual’s domicile can have significant implications on an individual’s tax affairs and other matters.
Currently, if an individual is deemed to be non-UK ‘domiciled’ under common law and statutory principles, then Inheritance Tax in this jurisdiction on their deaths would typically only be chargeable on their assets situated in the UK.
Outlined Changes
From 6th April 2025, the government intend to move Inheritance Tax from a domicile based regime to a residence based regime, although this is subject to consultation.
The changes to domicile also relate to other taxes, which are outside the scope of this article.
5.Digitalisation of Inheritance Tax System
The government intend to invest £52 million to digitalise the Inheritance Tax service from 2027/2028, to provide a modern and easy-to-use system. The view is to streamline the preparation/submission of Inheritance Tax returns and the payment of Inheritance Tax.
Conclusion
It is important to highlight that until the changes comes into effect, the current rules stand.
If you are affected by these changes or wish to obtain further details in connection with the same, then please contact Kieran Athow on 01328 863231 or, alternatively, via email at kieran.athow@hayes-storr.com.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
