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Inheritance Tax Changes: Inheritance Tax Changes
Inheritance Tax (IHT) is widely considered complex, ineffective, and unjust. And with high property prices and a nil rate band (£325,000) frozen since 2009 – now extended by the Chancellor to 2030 – increasingly more people are caught in the IHT net. Frankly, it’s unsurprising that a 2023 survey of 2,000 people on behalf of financial services company Hargreaves Lansdown revealed IHT as the most detested tax among respondents. So, where do recent Inheritance Tax changes leave us?
For many years, the Society of Trust and Estate Practitioners (STEP) has called for reform to the IHT system. Specifically, they suggest that a low tax rate with few exemptions and reliefs would result in greater simplicity and fairness for families.
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All-Party Parliamentary Group
In January 2020, the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness produced its report. Recommending major reform to IHT, their proposals included:
- introducing a flat rate ‘gift tax’ payable both on lifetime and death transfers;
- abolishing the seven-year gifting regime with its associated taper relief;
- scrapping all tax reliefs other than the spousal and charity exemptions; and
- ending Capital Gains Tax (CGT) uplift on death.
Their recommended flat rate was a 10% tax on a person’s worldwide estate up to a value of £2 million. Above this threshold, the rate would be 20%.
Less tax avoidance
Evidence considered by the APPG suggests that rates above 20 per cent incentivise tax planning. So, by cutting rates, there would be less avoidance while maintaining the UK’s attractiveness for wealthy individuals.
A survey of 500 STEP members revealed that almost two-thirds agreed with the APPG’s recommendations.
So, where do the Budget’s Inheritance Tax changes leave us?
With annual receipts almost doubling from £3.8 to £7.5 billion in a decade, IHT is an absolute cash cow for the Treasury. And in her first Budget, Chancellor Rachel Reeves announced a swathe of measures eventually expected to swell those receipts by a further £2.3 billion annually. However, despite significant changes, wholesale reform of the IHT system remains on the back burner. In particular, the APPG’s recommendations have not been introduced.
The Chancellor’s three new policies can be summarised as follows:
- Significant reforms to business property relief and agricultural property relief, applying from April 2026.
- A reduction in tax relief for Alternative Investment Market (AIM) shares (previously qualifying AIM investments obtained total relief from IHT).
- From April 2027, IHT will apply to all transferrable pension wealth at death, long viewed by Labour as a significant tax avoidance loophole benefitting the wealthy.
- The further freezing of the IHT nil-rate band (fixed at £325,000 since 2009) and residence nil-rate band (static at £175,000 since 2020) – extended for two more years to 2030.
In addition, the Chancellor introduced draft legislation to change the existing domicile-based system to a new residence-based system from 6 April 2025. This change was first announced by the Conservative government earlier this year. Interestingly, however, the Office for Budget Responsibility estimates this will raise only a very modest amount of additional tax revenue.
Inheritance Tax Changes: Next steps
Despite these changes to IHT, and depending on your circumstances, you can still reduce or even eliminate your estate’s IHT liability through simple estate planning.
Contact the experts in our Lifetime Planning and Wills Team on 01225 755656 or complete the Contact Form below.