On 30th October 2024, the new Labour government delivered their first budget which will introduce a number of changes as to how much tax your estate may pay after your death.
Alicia Speed, a solicitor in our wills, probate and trusts department, provides an overview of the current inheritance tax thresholds, highlights the main changes introduced in the recently announced budget, and outlines why it is important to consider how this may affect you, and your loved ones after your death.
As estate planning and will writing solicitors, all of the team specialise in drafting wills and providing advice on estate planning, including how best to protect your estate and plan for the future. Our estate planning solicitors are on hand and able to provide you with tailored legal advice in relation to your specific circumstances.
Nil rate band and residence nil rate band
The current inheritance tax nil rate band has been confirmed and will be frozen up to 2030. The inheritance tax nil rate bands have remained unchanged since April 2009, meaning that by time this comes into effect there will have been no increase for over 20 years apart from the implementation of the residence nil rate band.
Currently inheritance tax is charged to each estate as below:
- If you are a single person with no children, inheritance tax would be charged at a rate of 40% on all assets held over £325,000.
- If you are a single person with direct descendants (children, grandchildren or their widowed spouses, whether a blood, foster or step relative), you may be able to utilise the residence nil rate band which allows you to leave an additional £175,000 to those direct descendants. There are specific criteria to follow with regards to claiming the residence nil rate band, and therefore it is imperative to seek legal advice if you are in doubt as to whether your estate will benefit from this relief.
- For couples who are married or in a civil partnership and leaving everything to each other, there will be no inheritance tax payable due to the spousal exemption. Upon the second death, if they do not have direct descendants, they will be able to leave £650,000 to their chosen beneficiaries and inheritance tax will be payable at 40% on anything above £650,000.
- Further to the above, for those couples with direct descendants and a property worth at least £350,000, a total of £1,000,000 could be left to their chosen beneficiaries free of inheritance tax upon the second death.
The residence nil rate band can only be fully utilised on estates worth less than £2,000,000 and therefore once an estate is valued in excess of £2,000,000 the amount of relief available will decrease.
Therefore, although each person is always able to leave up to £325,000 to their chosen beneficiaries without any inheritance tax liability, it will depend on each person’s specific circumstances as to whether they have any additional exemptions and reliefs.
Given the additional residence nil rate band does not automatically apply to all estates, and as the nil rate bands remain frozen for the next six years, it is likely inheritance tax will become payable on many more estates in coming years.
There are various other potential exemptions and reliefs available, for example if a person leaves assets to a charity, and therefore it is advisable to seek specific legal advice if you are in any doubt as to how much you may be able to leave to your chosen beneficiaries, free of inheritance tax after your death.
Pensions
The Government announced that pensions will no longer have the potential to be excluded from a person’s taxable estate after their death. Although the Government are currently consulting on this, and further information will be released after the consultation ends in January 2025, pensions will essentially become part of your taxable estate after death. The Government are consulting as to how the taxation of pensions will be implemented, and who will bear payment of the tax, when this change comes into effect in April 2027.
Currently a pension can be excluded from your estate for inheritance tax purposes, where certain criteria has been met. Given that pensions can often be the most valuable asset in a person’s estate, this change will inevitably result in far more estates becoming liable to inheritance tax, especially given inheritance tax nil rate bands are frozen until 2030 and the taxation of pensions after death will be implemented in April 2027.
Agricultural Property Relief (APR) and Business Property Relief (BPR)
Both APR and BPR are inheritance tax reliefs which currently allow for a qualifying agricultural or business property or asset to be afforded 100% relief from inheritance tax. It is dependent on the type of asset, as in some instances the asset may only qualify for 50% relief. Currently there is no limit to the amount which can be claimed, providing it qualifies as either APR or BPR.
The Government have however confirmed there will be a limit on the value of the relief to be obtained – being set at a combined limit of £1,000,000 – and anything above £1,000,000 will only receive a 50% relief. Therefore, with the current rate of inheritance tax at 40%, this will mean inheritance tax will be payable at 20%.
Alternative Investment Market (AIM) shares
At present, if you hold shares in certain companies on the AIM and have held these for at least two years, you can qualify for BPR at 100% and will not pay any inheritance tax on these.
From April 2026, such shares will only receive a 50% relief and therefore 20% inheritance tax will be payable.
The Government also announced a revised definition of residence in respect of domicile and therefore if you are in any doubt as to your position, or how the budget changes may affect you, we would strongly advise you to take independent legal advice to discuss the best way forward.
If you wish to book an appointment with one of our specialist estate planning lawyers, please contact partner and head of wills, probate and trusts Lydia McCaslin on probate@mincoffs.co.uk, or call our offices and speak to one of the team on 0191 281 6151.
