In her budget today, Rachel Reeves, the Chancellor of the Exchequer, announced fundamental changes to inheritance tax, the tax that applies on death and to some lifetime gifts.

It’s been over 18 years since there were significant changes to inheritance tax. Back then, in March 2006, it was changes to inheritance tax in relation to trusts. The changes announced today will be felt far more widely.

Pension funds

Most unused pension funds and death benefits will be brought within the scope of inheritance tax from 6 April 2027. A consultation has been set up to run for 12 weeks between 30 October 2024 and 22 January 2025.

Currently, pensions can be passed on free from inheritance tax on death, although there can be an income tax charge depending on whether a lump sum is paid out and the age of the deceased.

As many pension holders have put planning in place around the current rules, which might involve the use of trusts and expression of wishes in favour of these trusts or beneficiaries that are ‘chargeable’ for inheritance tax purposes, we would strongly recommend that reviews are now undertaken.

Business property relief and agricultural property relief

The government has also announced that from April 2026, it will reform agricultural property relief and business property relief, capping the value at which 100% relief is given on combined assets at £1,000,000. Thereafter, only a 50% relief will apply, making the rate of IHT 20%.

The cap will also apply to trusts holding assets which qualify for agricultural property relief and/or business property relief. Going forward, trusts set up before the budget today will each qualify for 100% relief on assets of up to £1,000,000. However, for trusts set up by the same person on or after 30 October 2024, the government intends to introduce rules to ensure this allowance is divided among these trusts.

Agricultural property relief and business property relief have traditionally been recognised as important mechanisms, allowing family businesses to pass from generation to generation. Some families have been reluctant to look at succession planning during lifetime due to the capital gains tax uplift on death. However, in the future, with relief above £1,000,000 limited to 50% relief, succession planning during lifetime is likely to be far more attractive.

Alternative Investment Market

Currently, shares held in certain companies on the Alternative Investment Market (Aim) can qualify for business property relief at 100% and are therefore free from inheritance tax on death once held for two years. It was announced today that from 6 April 2026, such shares will only qualify for a 50% rate of relief, making the effective rate of IHT 20% on these assets.

Domicile and inheritance tax

As expected, the government announced that from April 2025, the ‘non dom’ tax regime would be abolished and instead a residence test would be brought in. This was a policy announced by the previous Conservative government and expected to be continued by the current government. For inheritance tax purposes, a person will be subject to UK inheritance tax on their worldwide assets once they have been resident in the UK for at least 10 out of the previous 20 tax years.

In summary, today’s budget has seen the most significant changes to inheritance tax in a generation. Given the lifetime planning that many people have in place in their wills, trusts and pension arrangements, now is the time to review those arrangements and consider whether tax efficiencies can be improved going forward.

For any additional guidance, please feel free to reach out to our Private Client team.

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