How will the October 2024 Budget Changes Affect Your Inheritance Tax Bill?
The Chancellor’s October 2024 Budget delivered some significant changes to inheritance tax (IHT) that will affect many of our clients. While there were several announcements, we’re focusing on the two most impactful changes: reforms to Business Property Relief and the inclusion of pensions in IHT calculations.
Important note: While these changes have been announced and are currently going through consultation, they are not yet written into law. Draft legislation has been published but remains subject to technical consultation. The final legislation is expected to be confirmed in late October or early November 2025. However, given the government’s stated position, these changes are widely expected to proceed as announced.
These changes don’t take effect immediately, but understanding their impact now is crucial for effective planning. This article aims to break down what’s changing and what it means for you and your Inheritance Tax bill.
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What are the Key Changes to Inheritance Tax?
Two major changes will reshape how IHT is calculated:
- Business Property Relief (BPR) Changes – From 6 April 2026 Currently, qualifying businesses can receive 100% relief from IHT with no upper limit. From April 2026, this 100% relief will only apply to the first £1 million of business assets. Any business value above £1 million will receive 50% relief, meaning an effective IHT rate of 20% on the excess.
- Pensions Brought Into IHT – From 6 April 2027 Pensions have traditionally sat outside the IHT regime. From April 2027, unused pension funds will be included in your estate for IHT purposes and taxed at the standard 40% rate (after allowances).
How Much Extra Tax Could You Pay?
To illustrate the impact, let’s look at a typical scenario. Imagine someone with:
- A business worth £3 million
- A pension pot of £1 million
- Their home and other assets using up their nil rate bands (£325,000 plus £175,000 residence nil rate band)
Here’s how their Inheritance Tax Bill changes across the three key time periods:
Before 5 April 2026 (Current Rules)
- Business: £0 taxable (100% BPR)
- Pension: £0 taxable (outside IHT scope)
- Total IHT liability: £0
Between 5 April 2026 and 5 April 2027
- Business: £1 million taxable (50% relief on £2m above threshold)
- Pension: £0 taxable (still outside IHT scope)
- Total IHT liability: £400,000
After 5 April 2027 (Full Changes)
- Business: £1 million taxable (as above)
- Pension: £1 million taxable (now included in estate)
- Total IHT liability: £800,000
Why Are These Changes So Significant?
The £800,000 increase in this example represents a substantial shift in tax liability. For many of our clients, their business and pension represent their largest assets after their home, making these changes particularly relevant.
The phased implementation means there are different planning windows:
- Six months to prepare for BPR changes
- 18 months before pension changes take effect
Point to note – There are already transitional rules in effect in respect of the BPR changes which apply where a gift is made between 30 October 2025 and 6 April 2026 and the person making the gift dies after 5 April 2026.
When Do These Changes Take Effect?
The timing is crucial for planning:
- 30 October 2024: Changes announced & transitional period commences
- 6 April 2026: Full BPR changes take effect
- 6 April 2027: Pension changes take effect
The consultation period is ongoing, but this is now only in respect of technical matters relating to implementation and the expectation is that changes are unlikely to be substantially revised.
What Planning Options Are Available?
While the specific strategies will depend on individual circumstances, some key considerations include:
Time-Sensitive Actions (Before April 2026) Many traditional IHT planning strategies become less effective or more expensive after the BPR changes. Gifts that are made now will still fall within the new rules if the donor dies after 6 April 2026, but there is still a window to maximise the benefit of certain trust structures for BPR qualifying assets.
Early action also starts the famous seven year clock ticking…
Pension Strategy Reviews With pensions coming into the IHT net, the traditional advice to preserve pension wealth may need revisiting. The balance between taking pension income now versus preserving it for inheritance has fundamentally shifted.
Business Structure Planning For business owners, there may be opportunities to restructure operations or ownership to maximise the available reliefs under the new rules.
What Should You Do Next?
Given the scale of these changes and the time-sensitive nature of many solutions, we recommend:
- Review your current position: Understanding your potential IHT liability under the new rules
- Assess planning opportunities: Identifying strategies that could reduce the impact
- Consider timing: Certain solutions work best when implemented before April 2026
The potential tax savings are substantial – in our example, effective planning could save hundreds of thousands of pounds. This makes professional advice not just valuable, but essential.
How Can We Help?
These changes affect most of our clients to some degree. Whether you’re a business owner, have substantial pension savings, or both, the new rules will likely impact your estate planning.
We’re hosting a comprehensive seminar on 21 November to help clients understand these changes and explore their options. Further details will follow, but if you’d like to be added to the wait list, please get in touch. The combination of significant potential tax increases and limited time to act makes this planning particularly urgent.
The bottom line: With IHT liabilities potentially doubling or tripling for many clients, the cost of inaction far outweighs the cost of proper planning. The window for optimal planning is limited, making now the right time to review your position.
This article focuses on the two main IHT changes affecting our clients. These proposals are subject to consultation and final legislation, expected in late 2025. Individual circumstances vary, and professional advice should always be sought before making any planning decisions.
Inheritance Tax Liability Comparison Table
Scenario: £3m Business + £1m Pension + £500k Other Assets
|
|
Before 5 April 2026 (Current Rules) |
5 April 2026 – 5 April 2027 (BPR Changes Only) |
After 5 April 2027 (BPR & Pension Changes) |
|
Business Relief |
100% BPR No limit |
100% on first £1m 50% on remainder |
100% on first £1m 50% on remainder |
|
Pension Treatment |
Outside IHT scope |
Outside IHT scope |
Included in estate |
|
Taxable Business |
£0 |
£1,000,000 |
£1,000,000 |
|
Taxable Pension |
£0 |
£0 |
£1,000,000 |
|
Total IHT Liability |
£0 |
£400,000 |
£800,000 |
|
Increase vs Previous |
– |
+£400,000 |
+£400,000 |
Impact Analysis
|
Change |
Tax Increase |
% of Total Impact |
|
Business Property Relief Reform |
£400,000 |
50% |
|
Pension Inclusion in IHT |
£400,000 |
50% |
|
Total Impact |
£800,000 |
100% |
Key Assumptions
- £325,000 nil rate band fully utilised
- £175,000 residence nil rate band fully utilised (home left to direct descendants)
- Business qualifies for Business Property Relief
- No other IHT planning in place
- Standard 40% IHT rate applied to taxable estate
Note: These figures are based on announced changes that are subject to consultation and final legislation expected in late 2025.
Please note: individual advice can only be given to clients engaged with us for personal planning. The above is provided for general information purposes only.
Contact us today to start planning with confidence.
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