Following the announcement of the Labour Government’s first budget in Autumn 2024, Inheritance Tax planning is more relevant than ever.
Pensions
Under current Inheritance Tax rules, the value of pension funds generally sits outside of your estate for Inheritance Tax purposes.
However, a considerable change announced by the Labour Government is that pension death benefits will be included within the Inheritance Tax “net” for deaths after April 2027. This will ultimately mean those with large pension funds will pay more Inheritance Tax on their estate, and many estates which would not otherwise have been subject to Inheritance Tax will now face an Inheritance Tax bill. This leaves many people in a situation considering how best to plan.
The practicalities of how Inheritance Tax will be paid from pension funds, (particularly if there is no other available cash in the estate), is yet to be confirmed, although we expect that these changes will make obtaining a Grant of Probate and administering an estate a lengthier process.
Frozen nil rate bands
The Inheritance Tax “Nil Rate Band” (NRB) is available to all individuals and is the amount that can be offset against the value of your estate. Essentially, it is the amount that can be passed to your beneficiaries free from Inheritance Tax after death. The figure has been frozen at £325,000 since 6 April 2009.
The “Residence Nil Rate Band” (RNRB) is an additional allowance of £175,000 which can be applied to an estate where the deceased owns, (or owned previously), a property that was their residence, and their interest in said property is left to lineal descendants on death. The RNRB has been set at £175,000 since 6 April 2020.
Both NRB and RNRB allowances are transferable between spouses. The government have confirmed that the NRB and RNRB allowances will continue to be frozen at their current figures of £325,000 and £175,000 respectively until at least 5 April 2028.
The combination of frozen allowances together with inflation and rising property prices means that more estates will be pushed over the tax threshold. With the additional inclusion of pensions within the net figure for Inheritance Tax purposes, this will result in more individuals paying Inheritance Tax on death.
Residence nil rate band -taper threshold
The RNRB is subject to a ‘taper threshold’, whereby the allowance is gradually reduced, or tapered away, where an estate is worth more than £2million. This applies even if a home is left to direct descendants. The taper applies at a rate of £1 for every £2 of value over £2million, such that if an estate is worth more than £2,350,000 then the RNRB of £175,000 would taper away completely.
Exemptions, (such as the spouse exemption), and reliefs, (such as Business Property Relief or Agricultural Property Relief), are ignored for the purpose of assessing whether the £2million taper threshold has been exceeded.
There are currently no proposals to increase the taper threshold above £2million.
Considering that more people are now likely to fall into having a chargeable estate to Inheritance Tax on death, it may be that more estates also lose the additional RNRB allowance in part or in full because the value of their estates exceeds the £2million taper threshold. The inclusion of pensions in the net value of the estate will have a significant impact on this.
It is now more vital than ever to take advice on your estate planning matters. Please do not hesitate to contact one of our Private Wealth specialists for further information as to how you can ensure Inheritance Tax efficiency through your estate planning.
