Chancellor Rachel Reeves has announced reforms to Inheritance Tax (IHT) in the Budget, part of the Labour government’s effort to raise £40 billion in new taxes.
While the current IHT thresholds will remain frozen at the current levels until April 2030, funds previously exempted from IHT will now be taxed.
Inherited pensions will be taxed from April 2027, ensuring that pensions remain a means to fund retirement instead of “a tax planning vehicle to transfer wealth”.
The government will also bring changes to agricultural property relief and business property relief from April 2026.
While farming and business properties with a combined valuation under one million pounds shall remain exempt from IHT, the properties with a higher valuation will be taxed at an “effective rate of 20 per cent”.
Tax advisor Dan Neidle said that although the threshold for agricultural land would be £1 million, the figure was “misleading, because IHT won’t usually apply to farms worth £1m.”
Neidle calculated that many farmers would only start paying IHT over £2 million because of other tax exemptions, and that many farmers would give their farms away to children before their deaths, thus reducing or eliminating IHT.
Assets in offshore trusts will no longer be exempt from IHT, with transitional agreements for people who have set up their finances under current regulations.
The current IHT levels, set to remain in place for nearly six more years, allow individuals to inherit up to £325,000 from an estate without tax.
This allowance goes up to £500,000 if the estate includes a residence passed to direct descendants, and further up to a million pounds if the beneficiary is a spouse or a civil partner.
The excess in all cases taxed at 40 per cent.
The government stated that over 90 per cent of estates would not be paying IHT and that the proposed reforms would only impact the wealthiest 2000 estates.
The Office of Budget Responsibility estimates that the reforms would raise a combined sum of £2 billion in public finances.