Yesterday’s much anticipated Budget was a blockbuster, delivering tax rises of £40bn – the biggest rise in a generation. There were some significant announcements, not all of which were entirely expected. Some of the most impactful changes surround inheritance tax, pensions and ‘non-doms’.
In addition to the expected rise in capital gains tax, the Budget included some big changes to IHT that families will need to consider.
IHT is controversial – many consider it a second tax on wealth they have paid tax on already. Many countries, including Australia, Canada and India have no IHT at all, and the US has a tax-free allowance of more than $10mn (£7.7mn) per person.
The UK is already a high-tax jurisdiction on death, and now key reliefs are being stripped away, including on pensions, businesses and farmland.
IHT is payable on assets owned on death unless passing to a spouse or civil partner. Most families will never pay IHT: a married couple worth up to £1mn, living in their property worth at least £350,000, with at least one child, will pay no IHT on death.
The chancellor has frozen current tax allowances, notwithstanding recent high inflation. This will mean more families for whom IHT is a significant issue, and a 40 per cent tax charge is worth planning around.
Pensions
Pensions have always been exempt from IHT, being subject to income tax on withdrawal by the recipient in many cases. The chancellor has announced that from April 2027 this historic relief will come to an end, and pensions will form part of the taxable estate. This brings many more families into charge than before.
If the income tax charge on withdrawals is unchanged, this does appear to be a double tax charge.
Anyone implementing estate planning will now need to consider their pension as well, and a pension is not easy to transfer during a lifetime. The silver-lining is that it should not be necessary to update wills to account for this change – distribution of the pension should be governed by existing nominations.
A new mechanism will be needed for pension trustees to meet the new IHT, otherwise it will increase the burden on grieving families needing to pay IHT without access to the money.
Businesses and farmland
Business owners have benefited from a 100 per cent relief on qualifying business assets. This relief applies to trading businesses held for at least two years, and does not apply to investment companies.
This enables genuine business owners to pass on the business on death without wiping out other family wealth or forcing a sale of the business. This is a crucial relief.
The relief also applies to shares listed on the Alternative Investment Market (Aim shares), and similar investment options. This incentivises investment into these UK trading companies, which may otherwise be considered too high-risk.
Likewise, farmers qualify for relief on the agricultural value of their land, provided they have farmed the land for at least two years, or have an arrangement where someone else has farmed the land for at least seven years. Again, the relief is crucial to enable farms to pass from one generation to the next.
