Inheritance Tax Changes
As highly predicted there have been major changes to both Inheritance tax and capital gains tax announced in the Labour Government’s first autumn budget.
Inheritance Tax
Pensions:
Currently pension pots do not form part of an estate for inheritance tax purposes. Many use this benefit to pass funds to their family without incurring a 40% tax charge whilst at the same time encouraging people to save for their retirement. Under new proposals coming in April 2027, unused pension pots and death benefits payable, will be brought into a person’s estate for inheritance tax purposes. For some this will bring an otherwise tax-free estate into charge and for others will significantly increase their existing tax liability.
If the income tax rules relating to pensions remains unchanged many beneficiaries will face both an income tax charge and in inheritance tax charge on inherited pensions. This could amount to a charge as high as 75%.
This change could result in many changing their strategy when it comes to pensions so rather than leaving the pension pot to accumulate and drawing on other assets such as ISAs first, it may be more tax effective to draw down the tax free cash and use that to make gifts which will become exempt from inheritance tax after 7 years.
Agricultural and Business Property relief:
Under current legislation relief of 100% applies to all qualifying businesses and agricultural assets regardless of value. As from April 2026, the rate of 100% will be restricted to the first £1,000,000 of combined agricultural and business assets with anything over and above this figure only qualifying for relief at 50% effectively imposing a 20% tax rate on all assets over and above £1m.
Surveyors have suggested the average value of farms in the UK in the first half of 2024 amounted to £2.23m in relation to the land alone not including the house and outbuildings. The average farm would therefore see an inheritance tax bill of £246,600 if left by one individual to non-exempt beneficiaries. For many this would mean a proportion of the land having to be sold to pay the bill. With tight margins in farming this could result in some farming businesses becoming unsustainable. Reports from leading accountants predict this could result in around 4.8 million acres of land being at risk of having to be sold.
The allowance of £1m may seem generous but with land prices at the rates they are currently this would equate to a farm of less than 100 acres which is classed as a small farm.
There is better news for farms owned by a married couple or a couple in a civil partnership. In such cases, where there are two owners it may be possible to pass on a farm worth up to £3m tax free to children or grandchildren.
For example: Mr and Mrs Brown own Sandy Lane Farm and have two children. Each of them has a nil rate band of £325,000 and a residence nil rate band of £175,000 provided the property is left to their direct descendants. The combined allowances amount to £2m. The further allowance of £1m for agricultural property means there is a potential £3m tax free allowance.
For an individual the available sum will be £1.5m in total but only if that person has a property passing to direct descendants. For those without direct descendants the total allowance will be £1.325m
Nil rate bands:
The current nil rate band of £325,000 for each individual has been left untouched and will remain frozen until at least 2030. Also untouched is the additional residence nil rate band of £175,000 which many felt would be abolished. The transferrable allowance rules allowing a surviving spouse or civil partner to inherit their deceased spouse or civil partner’s unused nil rate bands also remains.
Capital Gains Tax
Rates for individuals:
Up until the budget the rates of capital gains tax were:
- On the sale of assets other than a property the rates were 10% for a basic rate taxpayer and 20% for a higher rate taxpayer.
- For gains on the sale of residential property the rates were 18% for a basic rate taxpayer and 24% for a higher rate taxpayer.
As from 30th October the rates are now:
- On the sale of assets other than a property the rates is 18% for a basic rate taxpayer and 24% for a higher rate taxpayer.
- For gains on the sale of residential property the rates remain at 18% for a basic rate taxpayer and 24% for a higher rate taxpayer
The government has essentially aligned the rate at which capital gains tax is paid.
Rates for trusts:
Up until 29th October the rate for trustees and personal representatives was 20% but this has now risen to 24%. The rate applicable to the gain made on the sale of a residential property remains at 24%.
Annual exemptions:
The annual exemption for individuals stays at £3,000 per year and for trusts it is half this at a rate of £1,500.
Conclusion
Since the budget there have been many protests especially from Farmers so we will need to wait until the publication of the Finance Act 2024-2025 is enacted.
Whilst the changes that have been announced are not welcome, many predicted further sweeping changes that did not materialise. Time will tell if these are the only changes the government will bring in over the course of this Parliament.
Our Wills and Probate team will be happy to guide you through everything you need to plan for your future. Simply give us a call on 01543 420000 and ask for one of our Private Client Team.