Following the recent statement by the Chancellor that there is a £22 billion hole in public finances, it is expected that the government will increase a number of taxes in the October budget, including Inheritance Tax (“IHT”).
Marc Brinklow, Manager in the Trust Department at HW Fisher says: “Inheritance Tax is bringing in a record amount of money to HMRC. Recent figures reveal £2.1 billion was collected in the last quarter to 30 June 2024, which is £83 million higher than the same period in the previous year. One of the driving factors for these increased receipts is the UK’s nil rate band which has been frozen at £325,000 since 2009. This has dragged more people into the Inheritance Tax net for the first time. With more changes expected to be announced at the next budget, more people could find themselves impacted by this tax.”
In this article, Marc looks ahead to the budget and the potential changes to IHT that could be introduced.
What could the changes look like?
1. Offshore Trusts – Labour’s manifesto specifies to “end the use of offshore trusts to avoid Inheritance Tax”. This suggests that we can expect new legislative changes to bring more offshore trusts into the scope of UK IHT. Such changes would affect very few people, largely non-UK domiciled individuals.
2. Reforms to various tax reliefs – Business Relief (“BR”) is currently available on qualifying business assets owned for a period of two or more years, therefore reducing or eliminating IHT on such assets. However, there is an indication that the government will either restrict the assets able to qualify for Business Relief or even abolish it altogether.
Similarly, there is a chance that Agricultural Relief (“AR”) is abolished, which enables individuals to claim up to 100% relief on the inheritance of agricultural land if it is being actively farmed. If the relief is not abolished, the government could choose to tighten up the qualification criteria as, whilst the land has to be actively farmed under the current rules, it does not have to be farmed by the owner. This is in contrast to the current rules for Business Relief.
3. Nil-Rate Band (“NRB”) – Unchanged since 2009, the NRB is currently £325,000 per person, which can be used against both lifetime transfers and transfers on death. By keeping the NRB at the same level, more entities will be captured under the IHT regime and subject to tax due to the ever-increasing price of assets. The NRB is therefore expected to remain frozen at £325,000.
4. Residence Nil-Rate Band (“RNRB”) – This additional tax-free allowance, currently set at £175,000, is available against the death estate if residential property is passed to lineal descendants of the deceased individual.
This Nil-Rate Band only applies to estates worth £2 million or less. There is a possibility the government will restrict the number of estates able to qualify by reducing the £2 million limit, despite inflationary rises affecting the price of assets.
When could these potential changes come into effect?
Any changes would likely take effect from 6 April 2025.
Marc adds: “Despite the uncertainty of these changes, it is worth reviewing your financial plans to mitigate the possible IHT impact. For example, transferring business assets to family members, gifting shares into trust and including charitable donations in your will, which can all reduce the amount of IHT payable by your estate.”
If you would like to speak to one of our experts about Inheritance Tax planning, you can get in touch with our tax team here.
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