Budget changes – inheritance tax reform will hit those inheriting businesses and farms hardest
Rachel Reeves, the UK’s first female chancellor, delivered her long-anticipated Budget today which included a host of measures seeking to increase tax revenue.
There was a lot of speculation as to if and how Inheritance Tax would be reformed, given the time and expense that often goes into estate planning by people wishing to leave gifts to their family and others after they’re gone.
Raising the headline rate of Inheritance Tax is often thought to be unpopular amongst people, regardless of whether their estate is likely to be captured by it. It was therefore predicted that reform would come in other forms, and Reeves’ budget today announced a number of measures doing just that.
Nil rate bands frozen
The first of those is that the current Nil Rate Band and Residence Nil Rate Band – the ‘tax-free’ allowances in a person’s Estate – will continue to be frozen until 2030. Reeves said that it is forecast that in this financial year, it is anticipated that 6% of estates will be subject to Inheritance Tax. It is very conceivable, however, that with recent rates of inflation and the values of properties continuing to rise over the medium to long term (1.9% in Bournemouth, Christchurch and Poole in the year to August 2024), that the number of estates that will be subject to Inheritance Tax in the next 3, 5 or 10 years will be significantly higher.
Changes to APR and BR
Reeves also announced a significant change to Agricultural Property Relief (APR) and Business Relief (BR). Previously, agricultural property that qualified for APR attracted a 100% relief. Some business property attracted reliefs of 50% or 100%, depending on its nature. Reeves announced today that the reliefs will be combined to produce a £1m flat relief across APR and BR, with any value over that threshold being subject to an effective 20% rate. This could cause significant problems for those inheriting such assets, as many farms and businesses would exceed the £1m threshold and even at 20% may mean farms have to be broken up to pay the bill, increase their borrowing significantly or even wind up their businesses.
AIM and other alternative listing shares which had previously attracted reliefs will also be subject to a 20% rate.
Pensions
The Chancellor also announced that “inherited pensions” will now fall into the scope of IHT. The detail on this has yet to be released, but this has the potential to amount to a very significant change for those that had thought they could pass pensions to their nearest and dearest with reasonable tax rates, especially if the original pension holder died before the age of 75.
Capital Gains Tax
Capital Gains Tax rate rises were widely anticipated, and Reeves confirmed that the lower rate would increase from 10% to 18% and the higher rate from 20% to 24%.
Planning now even more important
Changes to Inheritance Tax can lead to anxiety for those that have spent years planning and arranging their affairs to ensure that they can pass on as much of their estates as possible. The changes to APR and BR will require farmers and business owners in particular to revisit their estate planning, but today’s changes will mean that others also may want to revise their plans and consider whether their estates will be disposed of in the most tax-efficient manner.
How can Ellis Jones help?
Our team of specialists are experts in estate planning, and once the detail of these reforms has been absorbed, we would be happy to discuss your current estate planning and how the changes may affect these plans. If you would like to discuss your estate planning with our team, please contact us on 01202 525333 to find out how we can help.
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