Budget 2024 - IHT winners and losers

The Autumn Budget 2024 – who are the winners and losers from an Inheritance Tax perspective?

Rachel Reeves’ first Budget last week introduced a number of significant changes to inheritance tax (IHT), which have been widely reported on since. 

In summary:

• The freeze to the IHT thresholds has been extended to 2030 meaning the nil rate band remains at £325,000 and the residence nil rate band at £175,000.  The nil rate band threshold has been static since 2009 and the freeze means that more individuals fall into the IHT net each year with inflation, particularly in house prices. 
• Inherited pensions will be subject to IHT from April 2027
• Agricultural Property Relief (APR) and Business Relief (BR) will be capped from April 2026.  The first £1m of combined business and agricultural assets will continue to attract no IHT at all but for assets over £1m, IHT tax will apply with only 50% relief, resulting in an effective IHT rate of 20% on those business / agricultural assets which previously would have attracted 100% relief.  
• Qualifying AIM shares will continue to benefit from IHT relief but at a reduced rate of 50% from 6 April 2026 (an effective IHT rate of 20%).
• The existing “non-dom” tax regime will be abolished from April 2025.  A new residence-based scheme will be introduced to determine IHT instead. 

Rachel Reeves described this package of changes to IHT as taking a “balanced approach”.  In light of the changes, this articles explores who might be considered the IHT “winners” and “losers”. 

IHT Winners

1. Of course, the Government by raising revenue from more estates paying IHT both through the reduction in reliefs and the continued freeze to thresholds in the age of inflation.  Rachel Reeves stated in her speech that “taken together, these measures raise over £2bn in the final year of the forecast”. But freezing the thresholds further adds to fiscal drag in the age of inflation and brings more estates into IHT.
2. Potentially, those individuals young enough (with mental capacity) to make gifts and survive 7 years.  Despite speculation before the Budget that the 7 year time limit may be increased or a cap on gifting applied, this did not form part of the Chancellor’s changes to IHT.  This means that unlimited lifetime gifts – also known as “potentially exempt transfers” (PETs) - can still be made, with no reporting to HMRC required, which will not be subject to IHT assuming that the donor survives for 7 years from the date of the gift.  Again, for those who are young enough, taking out life insurance to cover the IHT on failed PETs can be an affordable and effective means of covering any IHT on death within 7 years (with tapering down after 3 years).
3. On the other side of the spectrum, those on their death bed with business/agricultural assets prepared to give those away and who die before 6 April 2026.  Those individuals will be subject to the current APR and BR rules, meaning that those assets (assuming they qualify and are still held by the recipient at death) can still benefit from 100% IHT relief.  (Note that the recipients will not then have the additional benefit of capital gains tax (CGT) free uplift in value on assets passed on death, which the Chancellor did not abolish or change at all, despite much speculation about that (especially when there is IHT relief on death)).
4. Those who have created trusts of business/agricultural assets already – in fact, the more the better as each of those pre-existing trusts will have its own £1m APR/BPR allowance (i.e. the allowance will not be shared between other trusts they make now, as will be the case for any future trusts). 
5. Those involved in environmental schemes such as the Sustainable Farming Incentive and Countryside Stewardship, as it has been confirmed that APR will be extended to land managed under such schemes from 6 April 2025 (maintaining the position of the previous Government), albeit that it appears that this land will nevertheless be subject to the £1m APR cap from April 2026.
6. AIM shareholders and the wider AIM market, where it was anticipated that such shares were going to lose their IHT relief entirely, making investment in the AIM market significantly less attractive and causing those shareholdings to decrease significantly in value.
7. Those with flexible Wills under which each spouse can “bank” their £1m relieved assets on the first death.
8. As strange as it may seem to say, those with a spouse meaning that all of the adverse impacts of these changes, including IHT on pension death benefits, are deferred to the second death meaning the survivor and their family has more time to plan (including making PETs in lifetime, where appropriate). 
9. Ex-pats who are non-resident for 10 years and can be certain (unlike under the domicile regime for IHT) that they have escaped IHT on their non-UK assets.
10. Going forward, those who are well advised to address the changes, ahead of implementation of the new rules. 

IHT Losers

1. Business owners and farmers.  Previously, business and agricultural assets were covered by 100% (or in some circumstances, 50%) relief from IHT, but this relief is now capped at an aggregate asset value of £1m, opening up these estates to potentially significant IHT bills.  After the £1m cap is reached, IHT relief is then applied at 50% reducing the top rate from 40% to 20% for these assets (that prior to Budget day would have suffered no IHT at all).  The more valuable the assets, the bigger the bill.  Kier Starmer has since said that farms worth under £2m will pass IHT free, by dint of this allowance plus a further £1m (two lots of nil rate band and residence nil rate band) – but in the vast majority of cases, even if the farm is worth less than that, given the complexities of the legislation, this is unlikely to be the case other than in very few, relatively simple cases.
2. The same concerns affect trustees holding such assets on trust – now those assets will be taxed at the effective rate of 20% on a qualifying life tenant’s death or at 3% on ten year anniversaries and exits from a discretionary trust.  Thought will need to be given as to how such charges can be funded.  If to pay the IHT the trustees need to take a dividend from the company in which they hold shares, the effective rate of tax on ten year/exit looks much closer to the “standard” 6% paid on non-IHT relieved assets and the trustees will need a power to pay the IHT out of income.
3. Heirs funding the IHT and trying to avoid forced sales of a business on a death (which is the rationale of BR and APR in the first place).  This could affect not only the deceased’s heirs but also the business’ employees and the economy more generally.  The instalment option available for relevant assets, with relief from interest on paid instalments, will be all the more important to ease cash flow pressures and allow for the retention of assets.  
4. AIM shareholders’ estates that will now suffer IHT at 20% on previously exempt assets and may suffer a further economic loss if the market takes a downturn accordingly.
5. Those with long established IHT strategies involving the use of APR, BR or so-called “Balfour planning”, that need to be reviewed well ahead of the implementation of the changes in April 2026.
6. Pension fund administrators who will become liable for reporting and paying the IHT but only after being told of the estate by the relevant personal representatives.  This will require considerable communication between them and the personal representatives which was previously unnecessary.  Pretty much everyone with a pension will need to review their strategy with reference to IHT and depending on whether they will die before 75 or after. Potentially, heirs will pay income tax on taking money out of the inherited pension as well as having to pay IHT on it. 
7. Long term residents of the UK (in 10 out of the prior 20 tax years) who will now suffer IHT on their worldwide estates.
8. Very many previously so called excluded property trusts that may suffer IHT on their non-UK assets in a way they were previously protected from.

Whilst it is not yet clear precisely how these changes to IHT will play out and what implications they may have, it is clear that taking the right advice will be important in the next 18 months to ensure that IHT plans remain fit-for-purpose and any action can be taken well ahead of April 2026.  Charles Russell Speechlys are closely monitoring the position and advising their clients on the impact of the Chancellor’s Budget on them.