In the run up to the Budget 2024, there had been much speculation about what changes might be made to Inheritance Tax (IHT) and whether the government would seek to introduce a wealth tax.
Introducing a wealth tax might have been highly controversial, and there were no overt wealth tax proposals announced. However, with the tax-free thresholds for estates being frozen until 2030, more estates than ever will be dragged into paying IHT.
The nil-rate band on death (and on certain lifetime transfers) has been £325,000 since 2009 and will remain frozen until 2030 – a 20-year freeze. If this had risen in line with inflation, this would be closer to £500,000. The value of a family home has not remained static, so by freezing nil-rate bands this would appear to be a wealth tax in all but name.
In 2017 the “residence nil-rate band” was introduced, theoretically to bridge this gap and applied to main residences left to children etc via the Will. Married couples can take advantage of their spouse’s unused allowances and so in essence a married couple could leave a family home worth up to £1million to their children free of IHT.
But there is a catch – the residence nil rate band is reduced when an estate exceeds £2 million, so with pensions coming into charge to IHT, many estates will be hit almost overnight.
Major changes to the IHT position of pensions were also announced, which will impact many who may have been using their pension funds as IHT planning strategies.
Unused pension funds (i.e. where benefits have not been fully drawn at the date of death) will form part of an estate and up subject up to 40% IHT.
Pension sums paid to surviving spouses, dependents or charities will not be caught by these changes.
The current plan is for the IHT due to be settled by the pension scheme administrators directly. This is subject to further consultation.
The new rules apply to deaths on or after 6 April 2027. There is time to review retirement and estate planning strategy in context of these proposals.