Measure
The government made a number of announcements related to the inheritance tax regime.
Nil-rate band thresholds
The current nil-rate band of £325,000 and residence nil-rate band of £175,000 will remain frozen for a further two years until 5 April 2030.
Unused pensions and death benefits
The government aims to bring the value of most unused pensions savings and death benefits within the scope of an individual’s estate for inheritance tax purposes. The measures will impact both defined contribution and defined benefit schemes where assets are not currently subject to inheritance tax, although the consultation launched today makes it clear that all life policy products purchased from pension funds, or alongside them as part of a pension package offered by employers, will not be subject to these new rules.
Inheritance tax reliefs
Agricultural property relief (‘APR’) and business property relief (‘BPR’) will be reformed from 6 April 2026. Currently, APR and BPR provide 100% relief from inheritance tax on qualifying assets.
A £1m combined allowance will be introduced and qualifying property within this allowance will continue to benefit from 100% relief. Above this threshold, the rate of relief will be reduced to 50%.
This allowance will not apply to AIM-listed shares and similar shares not listed on the markets of a recognised stock exchange, which will therefore receive 50% relief in all circumstances.
The £1m combined allowance will also be available for trusts in respect of ten-year charges and exit charges.
IHT thresholds: Individuals whose estate and qualifying residence value exceeds the respective nil-rate bands, or who make lifetime chargeable transfers, plus trusts that are subject to periodic inheritance tax and exit charges.
Unused pensions: individuals with unutilised pension funds upon death, or death benefits.
Reliefs reform: Individuals and trusts with assets that qualify for APR and BPR, including AIM-listed shares.
Unused pensions and death benefits will be subject to inheritance tax from 6 April 2027.
The changes to APR and BPR will apply from 6 April 2026. Lifetime transfers made on or after 30 October 2024 will also be in scope where the donor dies on or after 6 April 2026.
The extension to the current freeze of the nil-rate band thresholds will continue to bring more taxpayers within the scope of inheritance tax due to inflation.
Extending inheritance tax to pension funds and death benefits aligns with the government’s view that pensions should not be a vehicle for capital accumulation for the purposes of inheritance. For some people, this will represent a significant increase in the amount of inheritance tax that will be payable by their estate.
Changes to APR and BPR were speculated about before the Budget, particularly in respect of AIM-listed shares. That the relief has been restricted to 50% rather than being abolished entirely, and that 100% relief remains on up to £1m of qualifying property, will be welcome for most farm and business owners although may cause some concern in the case of larger estates.