Inheritance Tax (IHT) contributes less than one percent of total revenue to the Treasury (though still a lot of money - over £6 billion collected in the last six months of 2024). The government sees IHT as a way to enhance tax receipts without affecting working taxpayers.
The October 2024 Budget introduced several significant modifications with the aim of increasing revenue and closing tax loopholes within Inheritance Tax.
We have produced a quick tax calculator to help you quickly assess the impact from the changes.
The following are some important changes to note:
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Inclusion of Inherited Pensions in IHT
From April 2027, unused pension funds and death benefits will be included as part of the taxable estate.
Pensions, previously exempt from inheritance tax, will now contribute to the estate’s overall tax liabilities.
Pension scheme administrators are mandated to report and account for any corresponding tax due to the Taxman.
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Extension of the IHT Threshold Freeze
Both the nil-rate band (£325,000) and the residence nil-rate band (£175,000) remain frozen until 2030.
The extension of these freezes means that inflation and rising asset values will result in more estates falling outside taxable thresholds.
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Reform of Agricultural and Business Property Relief
This has received a lot of publicity with protests from farmers and media personalities like Jeremy Clarkson. The changes are effective from April 2026, with the exemption for agricultural and business assets to be capped at £1 million.
Assets within this threshold retain relief, while assets exceeding the cap are eligible only for a 50% relief, resulting in an effective tax rate increase on the surplus.
This measure is tailored to protect small family farms while ensuring larger estates contribute a fairer share.
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Broader Strategy to Close Loopholes
The changes aim to address avenues where estates could previously avoid taxation by transferring assets tax-free (e.g., certain pension schemes and business asset planning).
While the government’s intent is to secure additional revenue, there has been criticism regarding the potential burden on middle-income families and small business owners.
There are other changes speculated to be incoming in the March 2025 Spring Statement and directly impacting on IHT.
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Seven-Year Gifting Rule Revamp
There have been discussions on extending the seven-year rule for gifts by potentially moving to a ten-year period or replacing it with a lifetime gift allowance.
Despite the speculation, Chancellor Rachel Reeves has publicly clarified that there are no current plans to alter the existing seven-year rule exemption... but you never know!
We'll be providing a separate calculator for inheritance tax on gifts soon.
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Agricultural and Business Property U-Turn?
Although the October 2024 Budget set a £1 million cap on agricultural and business property relief, there is some conjecture about possible adjustments following the controversy and protests mentioned earlier.
As an appeasement, Rachel Reeves may be increasing the cap or modifying relief percentage. This would still allow further tax revenue for the Treasury, but calm tensions.
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Further Pension Inheritance Tax Changes
The inclusion of unused pension funds in the taxable estate starting from April 2027 still has time for adjustments.
