Revisiting Wealth Planning: IHT on Pensions and Business Property Relief Post-Budget
The 2024 Autumn Budget introduced sweeping changes to inheritance tax (IHT) rules for pensions and business property relief (BPR), reshaping how families can pass on wealth to future generations. These reforms demand a fresh look at estate and succession planning to avoid unnecessary tax burdens.
IHT on Pensions: Major Changes Ahead
Starting in April 2027, unused pension funds and death benefits will be brought into the IHT net. Currently exempt, these funds will now form part of an estate for IHT purposes, potentially facing a 40% tax. While the exact mechanisms will depend on final legislation, this change could diminish the attractiveness of pensions as a wealth transfer vehicle, especially for larger pots.
What this means for families:
- Holding excessive funds in pensions may no longer shield wealth from IHT.
- Alternative strategies, like lifetime gifting or using surplus income, could play a bigger role in tax-efficient planning.
- Care needs to be taken where estates now exceed £2m (including the pension values), as the valuable Residence Nil Rate Band (RNRB) of £175,000 may be lost or tapered down. Meaning the effective rate of tax on pension death benefits is potentially higher than the standard 40%.
Families may need to sell illiquid assets, such as property or land, to cover IHT bills and secure probate.
Business Property Relief: New Limits Introduced
From April 2026, the 100% IHT relief cap for business and agricultural assets will be set at £1 million. Any value above this cap will only qualify for 50% relief, effectively introducing a 20% tax on the excess. Shares listed on the Alternative Investment Market (AIM) will also see their relief reduced to 50%.
Planning points to consider:
- Families may need to sell illiquid assets, such as property or land, to cover IHT bills and secure probate.
- Distributing assets among relatives could help use multiple £1 million allowances.
- Doing this via trusts before 2026 could preserve the current relief rates, but anti-forestalling rules and the seven-year survivorship period require careful navigation.
-Exploring life insurance to cover potential tax bills.
The Practical Challenge of Funding IHT Bills
The requirement to settle IHT before obtaining probate can place a significant burden on families. In cases where estates consist of illiquid assets, such as family homes, land, or business interests, beneficiaries may face the tough decision of selling these assets to meet the tax liability. This could disrupt family legacies or force sales under less-than-ideal circumstances.
To avoid such outcomes, proactive planning is essential, including exploring life insurance policies to cover tax bills or restructuring asset ownership for better liquidity.
Why Now Is the Time to Act
With these changes looming, updating wills, revisiting pension strategies, and considering trust arrangements are more crucial than ever. Implementing life insurance to cover the IHT bill is a particularly effective piece of planning, given insurance becomes more expensive the older we get, the best time to review this option is now.
At Ella Rose Financial, we specialise in creating bespoke, tax-efficient plans to protect your family’s legacy and financial future. Please do get in touch if you would like to revisit your planning following the recent changes in legislation.
The Financial Conduct Authority does not regulate Trusts and Tax Planning. Some areas of Inheritance Tax (IHT) planning are not regulated by the Financial Conduct Authority. Some IHT planning solutions may put your capital at risk so you may get back less than you originally invested. Tax thresholds depend on your individual circumstances and may change in the future.