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The headlines will focus on the government’s decision to charge inheritance tax on any unused pension funds or death benefits. This is only part of the story, and there are a number of changes in the budget which makes a review of potential inheritance tax liabilities more important than ever. These measures are forecast to bring in over £2.2 bn in tax by 2030.

Pensions to come under IHT: We should first acknowledge that in principle, we agree with the government that pensions are for spending. They are primarily a tool we use to accumulate money as tax efficiently as possible and then convert it to income for use in retirement or semi-retirement. The government believes there are only 8% of estates which will be affected each year by moving any unused pension funds or death benefits into the inheritance tax regime. Those people seeking professional advice from a business such as ours are more likely to be within that 8% than the wider UK population. There is some time to work through these issues as the changes are not due until 2027 and there will be a consultation process to work through. This process might not change the end result but it will allow us to gain greater insight into the details and what alternative options are available.

We also have a concern about paying tax twice on the same amount. A pension fund left to a beneficiary will be faced with a potential IHT liability, but if the person who dies is over 75, the recipient of the income from that pension would also have to pay income tax. A double tax charge seems overly punitive. Nil rate bands frozen to 2030:  This almost slipped by unnoticed, but it has remained at £325,000 since 2009. If it had been uprated with inflation it would be over £500, 000 by 2028 when the current freeze was due to end.

Reliefs for business and landowners cut: Agricultural and business property relief (BPR) combined saved wealthy families from paying IHT on around £4.4bn of assets in 2021/22. BPR alone was worth £2.9 billion and used by 4,170 estates. Farmers, and other family-owned businesses, will be under increased pressure to sell assets or borrow to fund hefty IHT bills. They might just look for an exit now.
AIM relief cut: The rate of relief available for ‘unquoted’ shares listed on smaller markets like AIM has been cut to 50%, which means a 20% rate of tax assuming all other allowances are used up. This will affect around 0.3% of estates. The AIM market is worth around £70 billion, and shares can currently be passed on free of inheritance tax if they are held for at least two years before death. There were fears that the relief could be abolished entirely so the 50% cut might be viewed by those affected as acceptable. AIM market prices lifted immediately after the news suggesting that was probably the case.

All of these changes combined mean that IHT is a bigger issue than ever before. Sadly, it will ruin some carefully constructed estate plans where they use their pension or one or a combination of these reliefs or allowances to stay under the IHT threshold. However, there are still plenty of available solutions to this problem. It will be important for us to size up the problem with any clients who are affected.