With the recent Labour Budget on 30 October 2024, Personal Tax and Inheritance Tax (IHT) planning have come sharply into focus. Whilst some speculated that sweeping changes might alter longstanding exemptions, several key reliefs remain in place, providing significant opportunities for managing inheritance effectively. Here’s what you need to know for your Estate and IHT planning.
1. Gifts and the 7-Year Rule: Maximising Current IHT Exemptions
Despite concerns that the Budget might remove the “gifts out of excess income” exemption or extend the 7-year rule for Potentially Exempt Transfers (PETs) to 10 years, these rules remain unchanged. This means individuals can still use these provisions to support a robust lifetime gifting strategy.
The 7-year rule continues to allow substantial IHT relief on gifts made during your lifetime, provided you survive for seven years after making the gift. This is a powerful way to reduce the value of your Estate for IHT purposes over time. For more details on how exempt gifts can play into your inheritance planning, visit our website, where we explore these rules in greater depth.
2. Changes to Agricultural Property Relief (APR) and Business Property Relief (BPR)
One of the most impactful announcements in the Budget involves adjustments to APR and BPR, set to take effect from April 2026. Historically, some qualifying assets under these reliefs received a full 100% IHT exemption, and some received a 50% exemption. However, the upcoming changes introduce a £1 million allowance for 100% relief, with assets above this threshold only qualifying for 50% relief. It’s worth noting that any unused £1 million allowance cannot be transferred between married couples, as is possible with the nil-rate band (and residence nil rate band if conditions are met).
This adjustment may affect landowners and business owners alike, as the reduced relief could result in substantial IHT exposure for Estates holding significant APR/BPR-qualifying assets. A reassessment of your asset mix and potential tax liabilities could help ensure your Estate is structured effectively under the new rules.
3. Changes to AIM Shares Relief
For investors with AIM portfolios, the news that AIM shares will now only attract 50% relief instead of the previous 100% could be significant. This change, scheduled for April 2026, may impact those who have specifically invested in AIM-type portfolios to reduce their IHT burden. With transitional rules set to apply between now and 2026, now is an ideal time to assess your portfolio strategy to ensure it aligns with your IHT planning goals.
4. Inclusion of Unused Pension Pots in Estates
Starting from April 2027, any unused pension pots will be included in the value of your Estate at the time of death, making them potentially subject to a 40% IHT rate, depending on allowances and other assets. This change may lead individuals to consider drawing down pension pots earlier than originally planned to avoid a substantial tax burden on their Estate.
However, it’s essential to carefully weigh the tax implications of this approach, as drawing on pensions could lead to Income Tax liabilities. Reviewing your current plans with a Tax Advisor, alongside your Financial Advisor, can help you evaluate the best way to utilise your pension funds while protecting your Estate.
5. Draft Legislation: Proceed With Caution
The changes to APR, BPR, and pension inclusions in Estates are all subject to draft legislation, which is expected to be published next year. As details emerge, it’s crucial to avoid immediate restructuring that could have unintended consequences. For example, the Budget proposes that IHT due on APR/BPR assets could be settled by selling other Estate assets, but what happens if there are no other assets? This and other practical considerations will likely become clearer with legislative drafts, so holding off on any knee-jerk changes until we have full clarity is wise.
Visit our website to learn more about the existing IHT exemptions, the 7-year rule, and the strategies that remain viable under the new regulations.
