What the Autumn budget 2024 means for inheritance tax and estate planning
On 30th October the Autumn budget 2024 was announced by chancellor of the exchequer, Rachel Reeves. There were a lot of changes included in the budget which will affect both businesses and individuals.
Matthew Rose, partner in GA Solicitors’ wills, trusts and probate team, breaks down the main points for individuals in regards to inheritance tax and estate planning, and explains the impact these plans will have.
A summary of the key points from the Autumn Budget 2024
- The nil rate band is frozen until 2030.
- Inheritance tax elief for business owners and farmers is reduced.
- Pensions are set to lose their inheritance tax favourable status.
- Investors in the Alternative Investment Market (AIM) will see this relieved by half.
- Rules for non-domiciled individuals are changing.
- Capital gains tax rates are increased.
The continued freeze of the inheritance tax ‘nil rate band’
The Autumn budget 2024 confirmed that the nil rate band will remain at £325,000 until 2030. The last increase to this band was in 2009. Had it kept pace with inflation, it would now be just in excess of £500,000. The nil rate band remains transferable between spouses meaning that for a married couple the effective nil rate band is £650,000.
To combat the effect of inflation eroding the value of this, thought should be given to lifetime gifts or the use of the nil rate band on the death of the first spouse. Although this remains transferable to a surviving spouse, a trust created on the death of the first spouse for the benefit of the surviving spouse and other family members could present a better opportunity for growth when the inheritance tax thresholds remain frozen.
The inheritance tax residence nil rate band
The inheritance tax residence nil rate band remains in place and remains at £175,000 until 2030. It remains transferable between spouses, but the taper threshold remains £2M. If the taper threshold is breached, then the inheritance tax residence nil rate band will reduce by £1 for every £2 the estate exceeds the threshold.
Advice should be sought for married couples whose estates collectively exceed £2M but individually do not. Thought can be given to the use of the residence nil rate band on death of the first spouse, representing the potential to save significant sums of inheritance tax.
Business and agricultural relief from inheritance tax
The Autumn Budget 2024 detailed that, from 6 April 2026, both business and agricultural relief from inheritance tax will be subject to a combined £1M limit. If a business owner or farmer has business or agricultural assets in excess of £1M in their estate on death, the relief will be halved and so the effective rate of inheritance tax on those assets will be 20%. The £1M threshold will not be transferable between spouses.
Those with business or agricultural assets should review their wills and consider their estate planning. For spouses in business together, there is an opportunity to consider leaving assets qualifying for relief from inheritance tax directly to descendants or to trust rather than to the surviving spouse, in order to prevent the loss of their £1M 100% relief bracket.
Existing wills for farmers and business owners should be reviewed to consider any existing gifting or trust arrangements in light of this. Lifetime succession planning may also become more attractive in taking advantage of the potentially exempt transfer rules. Gifts made more than seven years prior to death remain outside of the scope of inheritance tax.
Pensions to lose their inheritance tax-free status
It was announced in the Autumn budget 2024 that, from 6 April 2027, pension funds will fall into the scope of inheritance tax. Currently, pensions can be used as an effective succession planning tool to mitigate exposure to inheritance tax. Often, other assets are spent prior to pensions to avoid the taxation of the pension withdrawals as income, and the further charge to inheritance tax on death in the estate.
Transfers of pensions to spouses on death will benefit from spouse exemption. However, they will then accumulate with the surviving spouse’s estate and be subject to inheritance tax on their death. This could impact eligibility for the residence nil rate band and advice should be sought to minimise these effects.
Pensions inherited following the death of an individual under 75 can be withdrawn free from income tax. For those individuals, there will be more flexibility in their planning options and consideration should now be given to how that inherited pension is best used moving forward. Gifting or other inheritance tax planning could be considered.
AIM inheritance tax relief halved
From 6 April 2026, inheritance tax relief on qualifying alternative Investment Market (AIM) listed holdings will be halved, to an effective rate of 20%.
The £1M band for business and agricultural relief will not apply to AIM and so those invested may consider seeking further advice around the mitigation of inheritance tax.
Inheritance tax for non-domiciled individuals
Another change detailed in the Autumn budget 2024, is that from 6 April 2025, inheritance tax for ‘non-doms’ will be decided by a residence test but will continue to apply to UK situs assets. For non-UK situs assets and moveable assets, this will apply if that individual was a UK tax resident for 10 of the last 20 years.
On leaving the UK, having been a tax resident for the last 20 years, you must be a non-UK tax resident for 10 years before losing your ‘domicile’ status for inheritance tax. Tapering applies to this rule, meaning that those who have been UK tax resident for 13 of the last 20 years must remain non-tax residents for 3 years to be outside of the scope of inheritance. Those who have been UK tax residents for 14 of the last 20 years must remain non-tax residents for 4 years and so on and so forth.
The new rules bring greater clarity and so allow for planning opportunities around exposure to inheritance tax.
Capital gains tax rates are increasing
On death, the rules around the uplift in value to the date of death value for an asset on inheriting remain in place within the Autumn budget 2024. Whilst inheritance tax is payable, if the asset is sold later, capital gains tax will be applied against the date of death value, not the value the deceased acquired the property for.
For lifetime transactions, capital gains tax rates are increasing. For all transactions, the basic rate will now be 18% and the higher rate will be 24%. For personal representatives of a deceased’s estate, the flat rate will be 24%. Personal representatives should continue to consider their options prior to selling assets at a gain. Appropriating these to beneficiaries may represent a better outcome and tax advice should be sought.
For those concerned about inheritance tax but heavily invested in assets with capital gains, gifting remains a conundrum. Capital gains tax could become payable on the gift and inheritance tax also payable on death within seven years of the gift. Gifts in trust can attract holdover relief in certain circumstances and such an option can be considered for individuals with illiquid assets when estate planning.
Conclusion
For those wishing to plan around estate succession and inheritance tax planning, the Autumn Budget 2024 has far-reaching consequences. With some changes awaiting consultation ahead of implementation and the drafting of legislation, further details are sure to follow in the months to come. Regardless of this, the announced changes highlight the need to be organised in your succession planning and to seek advice early in order to structure your affairs in the most efficient way possible to meet your succession aims.
Should you wish to further understand the most effective way to manage your estate and possible inheritance tax, you should seek advice from a professional.
The specialist inheritance tax team at GA Solicitors is experienced in providing clear legal advice and options and fully understands the changes to come following the Autumn budget 2024. Our solicitors in Plymouth can also work alongside your financial advisers to help you maximise the value of your assets and utilise suitable inheritance tax reliefs such as investments.
Contact the team today by calling 01752 203500 or emailing me directly via matthew.rose@GAsolicitors.com. We are ranked in The Legal 500 and Chambers High Net Worth, so you can be sure you are in the best possible hands.
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