Autumn Budget 2024: A deeper dive into the inheritance tax changes

As has now been widely reported there are some extensive changes coming to IHT. We’ve already shared a round up of the relevant private client matters and a deeper look at the changes to the non-dom regime.

However, in this article we wanted to delve into some examples to demonstrate what these changes would mean to individuals. 

Background

In the budget paper, the Chancellor says that “the government is making the inheritance tax system fairer by ensuring that wealthy estates contribute more to the public finances”, but there is a concern that this will instead catch hard working farmers and business owners, not just the wealthy. 

Further, the government claims that only 500 estates each year from 2026 to 2027 will be affected by the changes to Agricultural Relief. The omission of the number who will be affected by the changes to Business Relief and Pensions is notable. 

As a quick recap, there will now be a cap of £1m for assets that would qualify for Agricultural, or Business Relief. 

In addition, it has been confirmed that the £1m cap cannot be transferred between spouses like the Nil Rate Band or Residential Nil Rate Band. All BR or AR assets over the cap will receive 50% relief so will be taxed at an effective rate of 20%. 

AIM shares do not seem to benefit from the £1m band and will be taxed at an effective rate of 20%. 

Examples

Let us introduce you to Tabatha, Lysander, and John (who for ease of comparison, are all widow/widowers, who inherited full transferable nil rate bands totalling £1m, and their pensions are set up to pass outside of their estates). 

The Agricultural Relief and Business Relief changes take effect as of 6 April 2026, and the Pension changes take effect as of 6 April 2027. 

Example 1

Tabatha owns her own house valued at £800,000, has a pension valued at £800,000 and invested in some AIM shares as part of her IHT planning worth £500,000. She has other cash assets including stocks and shares and money in the bank totalling £200,000. 

While the reduction in the relief available on her AIM shares does create a tax liability in the event of a death after 6 April 2026, it is the inclusion of the pension in Tabatha’s estate post April 2027 that significantly adversely affects her. This is because the aggregation of the pension with the rest of her estate will trigger tapering of her residence nil rate band by £150,000 (£1 of relief lost for every £2 over £2m). 

So, not only is tax payable on the pension (£320,000), but there is also additional tax due because of the lost residence nil rate band (£60,000). Her family will be £480,000 worse off than had she died prior to April 2026.

Example 2

Lysander is the owner of shares in a family run business that makes widgets for vehicles. He owns company shares, valued at £5,000,000, a house valued at £500,000, cash assets of £100,000 and a pension valued at £1,000,000.

This is a relatively common example of someone who has set up their own business and made it a success, but most of their wealth is tied up in company shares and their company pension. In this case, it would be hard to fund the IHT liability without selling shares in the company, or dedicating almost all of the other assets to pay the tax.

Example 3

John made a career change to farming. He has a farmhouse valued at £400,000, 400 hectares of land valued at £12,000,000 and a pension pot valued at £1,500,000, as well as cash savings of £200,000. He also runs a restaurant, and a farm shop, both of which are collectively valued at £600,000. The farmhouse would not attract Agricultural Relief. 

This is an example of a farming family, who make a profit from farming land. For context of how much land you need to generate profit farming, the best public example is Clarkson’s farm, where land of this size reportedly generated profits of approximately £72,000 per year, although clearly that can fluctuate as is the nature of farming. 

It would be impossible to settle the IHT due on this land without selling some of the land or businesses, preventing farming families from passing their livelihoods down generations.

Conclusion

Running the numbers, we can’t see how Lysander or John’s families could run their businesses after their death. The cash required to fund the IHT would necessitate liquidating either land or shares. Even Tabitha, who has a relatively modest estate when taking into consideration rising house prices, has a substantial tax bill with her pension being caught by the IHT regime. 

It was widely rumoured before the budget that there would be a cap on Business and Agricultural Relief, but the threshold of £1,000,000 was unexpectedly low, and there is concern about the effects such a low threshold has on the ability for farms and businesses to continue after the death of a major shareholder. 

When announcing cuts in duties, the Budget reads “the government will always support the UK’s high-quality food and drink producers”. That seems hard to reconcile against the cuts to Business Relief and Agricultural Relief.