The Chancellor, Rachel Reeves, has announced wide changes to inheritance tax rules in her Autumn Budget 2024, with significant implications for pension schemes and business relief. These reforms represent some of the most substantial changes to inheritance tax planning in recent years.
Fundamental changes to pension Inheritance Tax treatment
From 6 April 2027, the tax-efficient status of pensions for inheritance purposes will undergo a dramatic shift:
- Pension funds and death benefits will be considered part of your estate when calculating Inheritance Tax.
- This ends the current favourable position where most pension death benefits pass outside the estate
- The change affects both personal and workplace pensions
The Government is consulting on implementation:
- Initial consultation closes on 22 January 2025
- Draft legislation consultation planned for 2025
- Final details of transitional arrangements to be confirmed
Business relief changes
Major changes to Agricultural Property Relief (APR) and Business Property Relief (BPR):
- These reliefs will now be limited to £1m in an individual lifetime with any excess being charged to inheritance tax at half the standard 40% rate.
- New restrictions on AIM shares qualifying for Business Property Relief and these will be instead charged at 20%
Comment
These changes represent a fundamental shift in inheritance tax planning. The inclusion of pensions within estates for inheritance tax purposes removes a key planning tool, while changes to business reliefs further restrict options for tax-efficient wealth transfer.
Although it only impacts a relatively small number of people including pensions within people’s estates, there will be life changing consequences for those it does affect, particularly those with large family farms and other businesses.
Over recent years pensions have been a key part of people’s financial planning, producing income, protecting against inheritance tax, and potentially providing for care fees later in life.
While pensions will remain a tax-efficient way to save for the future, we are likely to see a number of strategic changes to the way they are used and the rise of other planning options such as insurance and trust options alongside the re-emergence of annuities.
Estate planning should never be looked at in isolation but with this significant change, we would recommend a comprehensive review of your financial plans should be undertaken to ensure you are effectively using your assets to provide for yourselves during your lifetime and supporting your family when you are gone.
How can we help?
Sam Cawley is an Investment Director and Chartered Financial Planner in our expert Investment Management team. His areas of expertise include Inheritance Tax planning, investment advice for individuals, cash flow planning, and pension and retirement planning.
If you would like some advice on the above or any related subjects, please do not hesitate to get in touch with Sam or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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