The Changing Landscape of Inheritance Tax: What You Need to Know

With the upcoming inheritance tax (IHT) changes set to take effect in April 2025, a significant 54% of UK adults are re-evaluating their estate planning. This shift highlights growing concerns about how assets will be taxed and transferred to future generations. Whether you own property, run a business, or simply want to ensure your family is financially secure, these changes could significantly impact your long-term plans. Understanding the new tax landscape and taking proactive steps now could be the key to avoiding unnecessary tax burdens and safeguarding your wealth.

Key Changes to Inheritance Tax

Among the most notable reforms is that from April 2027, pensions will no longer be exempt from inheritance tax. That means that inheritance tax may have to be paid on your pension when you die. Despite speculation about the potential removal of the Residence Nil-Rate Band (RNRB) and changes to the standard Nil-Rate Band (NRB) the tax-free amounts remain unchanged: £325,000 or up to £500,000 where a main residence is left to a direct decedent, and up to £1m for married couples combining their allowances. Additionally, the current freeze on these thresholds has been extended from 2028 to 2030.

For business owners and those with agricultural assets, the most significant shift is the capping of Business Property Relief (BPR) and Agricultural Property Relief (APR) at £1 million. This means that family-run enterprises may face increased inheritance tax burdens, potentially resulting in financial strain or even the need to sell off assets to meet tax obligations.

Claire Earwaker dos Reis, Group Manager of Legal Operations, highlights the urgency of preparing for these changes:

"With the evolving inheritance tax landscape, it is more important than ever for individuals and businesses to take a proactive approach to estate planning. The key is understanding how these changes impact your financial future and ensuring that your assets are structured in the most tax-efficient way possible. Seeking expert legal and financial guidance now can help mitigate risks and safeguard wealth for future generations."

How These Changes Impact Estate Planning

Estate planning has always been a crucial aspect of financial management, but with these new tax regulations, reassessing strategies is now essential. Key areas to consider include:

• Trust Structures: The tightening of tax reliefs on trusts means that individuals relying on these structures for wealth preservation should seek expert advice.
• Gifting Strategies: The tax-free allowances on lifetime gifting may see adjustments, requiring families to reconsider how and when they pass down assets.
• Pension Planning: Changes to pension inheritance rules could mean that residual pension funds become subject to higher taxation.

Navigating Inheritance Tax Changes: Key Questions You Need to Ask

With the evolving inheritance tax regulations, understanding how these updates affect your estate is crucial. Whether you own property, run a business, or plan to pass wealth to your family, these tax changes could significantly impact your financial future. To ensure you are fully prepared, here are some essential questions to consider when reviewing your estate plan:

1. How will the capping of Business Property Relief and Agricultural Property Relief at £1 million impact your family-owned business? Will your heirs face unexpected financial challenges?
2. What estate planning strategies can you put in place now to mitigate inheritance tax liabilities under the new regulations?
3. How might these tax changes influence your decision to transfer wealth to your children or grandchildren?
4. What steps can you take to ensure your estate remains compliant with new tax rules while minimising your potential liabilities?
5. Have you considered how life assurance policies might help offset any increased inheritance tax burden on your beneficiaries?
6. If you own agricultural land, how could these changes affect your family’s ability to maintain or pass down your farm?
7. What long-term financial impact might these reforms have on your small or medium-sized business?
8. As a business owner, how can you strike a balance between tax efficiency and maintaining control over your enterprise?
9. Are there any legal avenues available for you to challenge or seek exemptions from the new inheritance tax provisions?
10. What should you consider when valuing your estate under the new relief caps to ensure your tax planning is accurate and effective?

Taking Proactive Steps

The key to navigating these changes lies in early preparation. Consulting with legal and financial experts can provide clarity and ensure that estate plans remain tax-efficient and aligned with personal and business goals. By staying informed and making necessary adjustments now, individuals and families can protect their wealth and legacy for generations to come.

If you’re unsure about how these changes affect you, now is the time to seek professional guidance. A well-structured estate plan is more than just a financial safeguard—it’s a crucial step towards securing peace of mind for the future.