With Chancellor Rachel Reeves extending the ongoing freeze to inheritance tax thresholds by two years – it will now end in 2030, rather than 2028 – growing numbers of families are at risk of being dragged into the inheritance tax net.
Only six per cent of estates will pay inheritance tax this year, but the trend of increasing inheritance tax receipts is showing no signs of slowing.
Inherited pensions will be brought into inheritance tax from April 2027, Reeves announced in last month’s Budget, while farmers and land owners will face changes to Agricultural Property Relief and Business Property Relief from April 2026.
The first £1million of combined business and agricultural assets will be exempt from inheritance tax, but assets over £1million will be subject to inheritance tax at a rate of 20 per cent. Shares on the Alternative Investment Market (AIM) and other similar markets will be subject to an effective tax rate of 20 per cent.
“It would be sensible for every individual with wealth likely to result in a liability of inheritance tax to review their position following the Autumn Budget,” Stuart Ritchie, an expert tax advisor and author of Who Will Get My Money When I Die?, told GB News.
“Particularly, given the changes to Business Property Relief and Agricultural Property Relief, the owners of businesses and farms would be well advised to dust down their succession plans and review them with their advisors.”
It’s expected that life assurance will become a more popular option, Ritchie explained, adding: “This will be dependent on it being obtained at affordable expense, which will probably mean taking cover at an earlier stage in their lifetimes and whilst still in good health.”
Farmers drove tractors to London to protest Rachel Reeves’ inheritance tax changes last week
PA
In this guide, we look at inheritance tax allowances as well as the upcoming changes to Business and Agricultural Property Relief.
Inheritance tax rate
The rate of inheritance tax is currently 40 per cent – which is “relatively high in comparison to many countries in Europe”, Ritchie noted.
The scope of inheritance tax
“The scope of IHT is currently based on the concept of domicile,” Ritchie said.
“Generally speaking, if you are domiciled or deemed domiciled in the UK, then your worldwide assets will be subject to IHT on your death. If you are not domiciled or deemed domiciled in the UK, then only your UK situs assets will be subject to IHT regardless of whether you are resident or not in the UK.
“There are other instances where a charge to IHT might arise, particularly in relation to trust funds and lifetime gifts to trust funds. It was confirmed in the Autumn Budget that domicile, as a concept for tax purposes, is for all intents and purposes abolished from April 6, 2025.
Inheritance tax allowances
The first £325,000 of a person’s estate may be left free of IHT, under the nil rate band.
This allowance accounts for most estates of the deceased in the UK, where the latest figures suggest only four per cent of estates pay inheritance tax.
The residence nil rate band lets a person pass on more tax-free – it’s an additional allowance of £175,000 on top of the nil rate band. It’s available if a person leaves their property to lineal descendants and their estate is not worth more than £2million.
Married couples could leave up to £1million, by both utilising these exemptions.
“It is a combination of the nil rate band and the residence nil rate band for a married couple who leave their wealth including the family home to their children which leads to the often quoted £1 million exemption,” Ritchie said. “The levels of these exemptions are being frozen up to April 5, 2030.”
Potentially exempt transfers
As well as making full use of inheritance tax gift allowances – such as the £3,000 annual exemption, the small gift allowance and gift allowances for weddings or civil partnerships – it could be possible to give more away without it being subject to inheritance tax.
“The UK does not have a gift tax so any lifetime gifts to individuals are free of IHT provided that the donor survives for at least seven years.
Business and Agricultural Property Relief
Some assets qualify for relief from inheritance tax, either as business assets or agricultural assets.
Ritchie explained: “From April 2026, the existing 100 per cent rate of relief will only be available for the first £1million of property qualifying for business property and agricultural relief. Thereafter, the rate of relief for both BPR and APR will be 50 per cent of the standard 40 per cent rate of IHT for any qualifying assets over the £1million threshold.
“The rules will apply to lifetime transfers made after October 30, 2024 if the donor dies on or after April 6, 2026. The main classes of assets qualifying for business property relief are:
- Own trading businesses
- Trading partnerships
- Shares in unquoted trading companies
- Shares in AIM listed trading companies.
“The agricultural value of agricultural property, either farmed in hand or where vacant possession can be obtained within two years or held under a Farm Business Tenancy, all qualify for Agricultural Property Relief from inheritance tax. This change has been dubbed the ‘tractor tax’.
“This is a significant blow for many farming and landowning families who wish to pass on an estate to the next generation as inheritance tax at the rate of 20 per cent will apply to the full value of assets.
“There is a risk that a high number of long-standing farming businesses will have to be sold or will fail as a result. With a reprieve of only 18 months before the new rules come into effect, it is essential that those likely to be affected by the new rules engage with their professional tax advisors now to try and mitigate the impact.
“It is also a significant blow to some very valuable private companies contributing significantly to the GDP of the UK and providing significant employment opportunities. The long term viability of these businesses could be severely impacted if business owners are having to raise up to 20 per cent of the total value of the business to pay IHT on every generational shift.”
Trust funds
With trust funds, inheritance tax is normally payable when:
- assets enter a trust fund
- on every ten year anniversary following the creation of a trust fund; and
- assets leave a trust fund between ten year anniversaries.
“The IHT rate on assets entering a trust fund is either the 40 per cent IHT rate on death or the 20 per cent IHT on lifetime transfers,” Ritchie explained.
“The IHT rate on other occasions is based on a six per cent rate. No IHT is payable if the assets entering a trust fund benefit from the currently available 100 per cent Business Property Relief or Agricultural Property Relief.
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“It is expected that the use of family discretionary trust funds will become increasingly popular as a means of mitigating inheritance tax on agricultural and business property, as exchanging a 20 per cent charge to inheritance tax on a death for a predictable six per cent charge every 10 years, which can be planned for, will be seen as a sensible antidote to the changes announced by the Chancellor.”
Excluded Property
As its name suggests, Excluded Property are assets excluded from the charge to inheritance tax.
“Typically, they are the non-UK situs assets of individuals who are not domiciled or deemed domiciled in the UK,” Ritchie said.
“They can also be non-UK situs assets an individual has transferred to non-UK resident trustees of a trust fund.
Excluded Property can be gifted without a charge to inheritance tax.
