There were a number of announcements related to Inheritance Tax (IHT) in the Autumn Budget on 30 October. How will these changes affect you?

Along with the freezing of both the nil rate band at £325,000 and the residence nil rate band at £175,000 until 2030, and the confirmation of the IHT rate remaining at 40%, the most significant changes in Rachel Reeves’ Budget included updates to pension savings, Business Relief (BR) and Agricultural Relief (AR), and the abolition of the Non-Domicile regime. These changes are covered in more detail below.

Pensions

With effect from April 2027, the value of an individual’s pension savings will form part of their estate on death and will be subject to IHT, reversing the IHT-free status introduced for most pensions in 2015. It is proposed that the IHT will be paid from the pension fund directly to HMRC, following a period of consultation on how this will work in practice. Under the current rules, it was generally advisable to draw funds from pensions (which are generally free from all taxes) last, as these could be left to any party free of IHT. While you may wish to leave nominations of beneficiaries as those other than your spouse in place up until April 2027, it is important to keep in mind that a change in nomination (and possibly also a change to your Will) may be required once the new rules come into effect. These changes could alter previous guidance significantly. For instance, if you pass away aged 75 or older, your pension could firstly be taxed at an IHT rate of 40%, with the remaining funds then subject to income tax at the beneficiary’s income tax rate of up to 45%, giving effective tax rates on inherited pensions of up to 67%.

Including pensions in an individual’s chargeable estate could also have other implications, such as in relation to the tapering of the residence nil rate band, which is tapered for estates in excess of £2m. Despite much speculation, no changes were introduced in respect of income tax relief or employers’ National Insurance Contributions on pension contributions.

Business relief and agricultural relief

The other main changes affect Business Relief and Agricultural Relief. These reliefs currently allow qualifying businesses and farms to be passed to the next generation free from IHT, intended to support the survival of these type of businesses following the death of their owner. Subject to the relevant conditions being met, Business Relief and Agricultural Relief can currently exempt the entire value of a business from IHT.

From 6 April 2026, there will be an individual limit of £1 million of assets that may qualify for full IHT relief under either Business or Agricultural Relief. Beyond that limit, relief will be given at 50%, effectively imposing an IHT rate of 20% on qualifying property, rather than 40%. AIM shares will be limited to the 50% rate of relief and cannot benefit from the £1 million exemption mentioned above.

Businesses subject to this cap may need to adjust their succession plans, and life insurance is likely to become a more important consideration for business owners. As it stands, life insurance proceeds can be structured outside of an individual's estate for IHT purposes, which may be essential in enabling the next generation to pay the IHT and continue the business.

No changes have been introduced in relation to the seven-year rule on Potentially Exempt Transfers (PETs) or the relief on gifting from surplus income. Nor were there any changes in relation to the spousal exemption or the Capital Gains Tax (CGT) uplift in base cost on death, as had been mooted.

The abolition of the non-domicile regime and why it could matter if you are returning to the UK

The changes affecting non-domiciled individuals are significant. This impacts IHT as the concept of domicile has, to date, determined the IHT treatment for such individuals, with non-domiciled individuals only within the scope of IHT on UK situs assets and certain non-UK assets deriving value from UK residential property.

The residence-based approach will apply for IHT purposes from 6 April 2025. Essentially, non-UK assets will be within the scope of UK IHT for any individual who is ‘long-term resident’, which applies where the person has been resident in the UK for at least 10 out of the last 20 tax years preceding the year of death or any other chargeable event.

The position on non-UK assets held within a trust is complex but, broadly, will depend on the settlor’s residence status. Assets would be outside of the scope of IHT as long as the settlor is not long-term resident. For periods in which the settlor is long-term resident, the usual IHT charges of up to 6% on each 10-year anniversary or on a capital distribution will apply, along with IHT of up to 40% if they are long-term resident at the date of their death. There is a specific exemption for many offshore trusts settled prior to 30 October 2024, which means these are not included in the settlor’s death estate, regardless of their period of residence. The switch to a residence-based system will impact those returning to the UK; UK citizens returning from overseas after a period of non-UK residence of 10 years or more could benefit from these changes.

Not only will they be able to return to the UK and avoid UK tax on their foreign income and gains for the first four tax years, but their non-UK assets would also fall out of the scope of UK IHT until they meet the conditions of long-term residence again.

Under the current rules, applicable to deaths prior to April 2025, it is difficult to prove that a domicile of origin in the UK has been displaced, especially upon returning to live in the UK. However, from April 2025, it will only be necessary to establish fewer than 10 years of UK residence in the final 20 years prior to death, for non-UK assets to remain outside the UK IHT net.