Inheritance Tax and the Hallowe’en Budget – Is the devil in the detail?

Yesterday’s Budget, the first to be delivered by a female Chancellor, was, as seems to have become the norm, heavily briefed in advance – an issue exacerbated by the new Government’s decision to delay its first Budget until almost four months after it came to power.

Inheritance Tax (IHT) has long been a much hated but rarely paid tax. Whilst the proportion of estates paying IHT has increased in the past two decades, mainly due to the main tax-free allowance remaining set at £325,000 since 2009, the most recent estimate is that only 6% of estates pay IHT.

Some of the early noises regarding Inheritance Tax were somewhat apocalyptic – higher rates; lower allowances; removal of reliefs – but in the end, the changes made by the Chancellor were not quite as significant or wide-ranging as had been trailed.

The headline rate of IHT remains 40%, and the tax-free allowances (the nil rate band of £325,000, and residence nil rate band of £175,000) remain. Indeed, the Chancellor confirmed that the existing freeze on allowances, scheduled to end in 2028, will remain until 2030 – so we can look forward to a 21st birthday celebration for the nil rate band of £325,000 in a few years time.

Hidden in the detail, however, were some more significant changes.

Chief amongst these was the decision to bring pensions into the scope of IHT from 2027. Currently, most pensions will pass to the nominated beneficiaries free of IHT. The Government has issued a consultation with the pensions sector, to consider how this scheme will work, but if, as seems most likely, the value of pension pots will be aggregated with a person’s other assets at death, this will mean significantly more estates paying IHT. The details of this will need to be studied carefully.

The Government also confirmed its well-trailed intention to abolish the non-domicile regime. IHT has always been something of an outlier when it comes to domicile, but again, this change could have significant impact on those who are resident, but not domiciled in the UK.

The other changes related to Agricultural Relief (AR) and Business Relief (BR). The Government has significantly restricted these reliefs, capping the 100% rate of relief at a combined £1m per person, with a 50% relief above this figure – so an effective 20% rate of IHT. These changes will come into effect from April 2026 and so, whilst there are forestalling provisions included in the Budget, farmers and business owners should urgently seek advice as to their positions.

Shares on the Alternative Investment Market (AIM), which previously attracted 100% BR, will now benefit only from a 50% relief. Given the risk an investor takes when dealing in AIM shares, the attractiveness of these assets is likely to significantly decrease.

As ever with Budgets, much of the detail is still to emerge. However, it is clear that these are some of the biggest changes to IHT in decades and will mean many will need to reconsider the structures of their estates, businesses or farms.

We are fortunate at Paris Smith in being able to call on the expertise of one of the country’s leading experts in IHT reliefs, Anthony Nixon, as well as many other expert colleagues in the Tax & Estates team.

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