With a new government comes new policies…
Following the Labour win in summer 2024, there was a lot of speculation about what changes would come into place.
Initially a £22 billion blackhole, this quickly increased to £40 billion, but how would the funds be raised if VAT, Income Tax and National Insurance were to remain untouched?
Our guess (along with many others) was increases to Inheritance Tax and Capital Gain Tax, which triggered a lot of activity leading up to 30th October 2024.
Basic IHT Rules (unchanged)
Each individual has a Nil Rate Band (NRB) to give away free of IHT.
This is currently £325,000 and is set to remain at this figure until 2030. For spouses/civil partners, if everything is left to the survivor, the unused percentage of the NRB can be transferred to be used against the survivor's estate.
In addition, if you have children and sufficient equity in your home, which you pass to your children or descendants, you may be eligible for an additional Residence Nil Rate Band (RNRB), which can be transferred to spouses/civil partners in a similar way to the NRB.
The RNRB is currently £175,000. If your estate exceeds £2 million, for every £2 over, £1 of the RNRB will be deduced and therefore, a couple with a combined estate of £2.7 million will not be able to benefit from the RNRB without further planning or structuring of their estates.
Anything over your available allowances will be taxed at 40%.
Headline changes to IHT
Businesses and Farms
From 6th April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) at 100% will be capped at £1 million and anything more than that will be taxed at 50% of the IHT rate, giving an effective IHT rate of 20% whereas previously, the exemptions were potentially unlimited depending on the circumstances.
Case study
Mr and Mrs Smith own a dairy farm (to include the house) worth £4 million. They have two children together, Jack and Jill. In their Wills, they leave everything to each other on first death and then equally between the children on second death.
Under the current rules, there would be no IHT on first because of spouse exemption and potentially no IHT on second death if they die before 6th April 2026 (assuming the relevant criteria has been met).
After 6th April 2026, there would be no IHT on first death, but on second death, the usual NRBs would be available; the RNRBs would be tapered away, APR is available for the first £1 million but the balance would be taxed, creating an IHT liability of £470,000.
AIM Investments
Will no longer be 100% exempt after the requisite two-year ownership period, but instead will be reduced to 50% relief.
Pensions
Previously not forming part of the estate for IHT purposes, they will be considered from 6th April 2027, which will add to the value of the estate for the purpose of qualifying for the RNRB.
Case Study
Mr and Mrs Jones have a house, savings and investments totalling £1.5 million and a pension of £1.3 million.
In their Wills, they leave everything to each other on first death and then equally between the children on second death.
Under the current rules, there would be no IHT on the first death because of spouse exemption, and on the second death, an IHT liability of £200,000 if they die before 6th April 2027.
After 6th April 2027, the value of their estate would be considered as £2.8 million, which means they would lose the RNRBs, leaving them with a taxable estate of £2,150,000 and an IHT liability of £860,000.
What can be done?
The key to IHT planning is precisely that: planning! While the available reliefs have been significantly reduced, it is still possible to maximise them.
It is vital to review your estate, assess your needs, estimate your life expectancy and expenditure, and determine your goals both during your lifetime and after death. Are there surplus funds you can start disposing of now? If so, lifetime gifting exemptions have not been amended.
Potentially Exempt Transfers (PETs)
It is still possible to gift capital from your estate. You have an annual exemption of £3,000 every tax year. Once you have exhausted the current tax year’s annual exemption, it is possible to use the one from the previous year (if available). Anything exceeding your annual exemption will be subject to a seven-year survivorship period. Whilst a lifetime gifting allowance of £30,000 has been suggested, it has not been implemented.
Gifts from Surplus Income
If you have surplus income (i.e. making the gift would not cause you to use capital to maintain your usual standard of living), you can gift this without having to survive seven years. The gifts would usually have to be more than a one-off payment but is not capped as it depends entirely on your surplus income after deducting your expenditure.
Gifts v Trusts
If gifting is an option, consider whether the gift should be outright or subject to a trust.
Outright gifts mean that the recipient has full control and use over the funds, which may not always be desirable - for instance, if the individual is vulnerable or has their own taxable estate. In such cases, a trust may be more attractive.
Trusts allow the separation of ownership from those who benefit but allow retention of control by the mechanism of appointing trustees, which can prove useful in lots of cases.
Either way, once the funds have been transferred, you should not retain any benefits to ensure that it does not get caught under the gifts with reservation of benefit for IHT purposes.
Contact Our Private Wealth Team
If you have any concerns regarding your Will and estate/IHT planning, please feel free to reach out to our specialist Private Wealth team.
01619414000
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Bik-ki Wong
Partner and Head of our Wills, Trusts, and Probate
Bik-ki has over 20 years of experience acting as a Wills, Trusts, and Probate solicitor. Bik-ki is an expert in dealing with high net-worth individuals as well as those who have more complicated circumstances or those with mental capacity issues.
About Bik-ki Wong