Inheritance tax (IHT) is a tax paid on the estate of deceased individuals that exceeds certain thresholds, known as the Nil Rate Bands (NRBs). It has recently been in the news due to some announcements made in the Autumn Statement at the end of October. In this article, we’ll explain the current circumstances around IHT before explaining the recently announced changes. We’ll then identify what can bring the value of your estate down.

Inheritance Tax as of November 2024

Currently, IHT is due on the estate of deceased individuals, when the value exceeds £325,000, which is the current NRB. This threshold rises to £500,000 if the estate includes a residence that is being left to any descendants of the deceased. The previous Conservative government froze the estate threshold at £325,000 until 2028.

IHT is charged at 40% of the value of the estate over the NRB. The estate comprises property owned by the deceased, possessions and money in savings. Any money or property left to loved ones in the seven years before death may also be subject to IHT. Money that is left in a deceased individual’s pension is not included in the IHT calculation as of November 2024 but this is set to change in 2027.

Example calculations:

An individual who has passed away has the below assets within their estate:

In the above worked examples, no tax is due in example one due to the total estate value not reaching the threshold. In example two, tax is due on the portion of the estate value above the threshold, in this instance £50,000. Example three includes a higher threshold, as the property has been left to the deceased’s children. The total estate value does not exceed the higher threshold. The final example also has a higher threshold, but the total estate value exceeds this. IHT is due on the value above the threshold.

What changes were announced in the Autumn Statement?

On 30th October 2024, the Chancellor of the Exchequer announced that the threshold for paying IHT will be frozen at £325,000 for a further two years. This will take the freeze to 2030. A further announcement that pensions will be subject to IHT from April 2027 was also made. Rachel Reeves stated that this would “close the loophole” left by the Conservative party. She was referring to the fact individuals were depositing money in private pensions, to bring their estate value under the threshold, thus avoiding IHT.

A potential concern is that individuals will now begin to withdraw from their pensions as a tax-free lump sum earlier. Spending it or gifting it to loved ones, will still help to protect it from IHT, but this may leave them without the funds they require for retirement, and have an immense impact on retirement planning. The details of this portion of the IHT announcement is yet to be announced. We’ll bring you more news on it, as it is announced.

Farming and Agriculture

Under the current IHT rules, the land used for crops or rearing animals may be handed down through families without being subject to IHT. This exemption also includes farm buildings, cottages and houses.

In October’s Autumn Statement, however, the Chancellor announced that from April 2026 there would be some changes to this exemption. If the total value of these assets is below £1,000,000, they will still be exempt from IHT. However the value of assets above the £1,000,000 threshold will be subject to IHT at an effective rate of 20%.

This will necessitate far more financial planning for those involved in the agricultural industry so please do get in touch if you want to discuss how these changes could impact you personally.

What can bring down the value of your estate?

There are a number of items that are not included in the IHT calculation. Household bills, mortgage and credit card debts and funeral expenses are exempt from IHT. However, solicitors and probate fees, along with any other costs that are incurred by the estate after the death of the individual are not exempt. Until the end of March 2027, money that is left in private pension funds after death are exempt from IHT.

By gifting 10% of the net value of your estate to charity, the rate of IHT is reduced from 40% to 36%. The amount gifted to charity is also exempt from inheritance tax.

Gifting assets, including money or property to loved on before death may also make it exempt from IHT. This is subject to the so-called 7 year rule where gifts given more than 7 years before the death of an individual are exempt from IHT calculations. However that gifted within seven years will be subject to a sliding scale of IHT. If the gift was given less than 3 years before the death of the individual, it is subject to full IHT, payable by the recipient. The below table shows the amount due on gifts dependent on when they are received.

Still confused by the latest announcements?

The latest announcements have left many confused about the situation their loved ones will be faced with after they pass. Don’t worry – we’re here to help. Contact our team and we’ll work with you to ensure your money is working effectively for you. We’ll also advise you regarding inheritance tax, and explain what your situation is likely to be, to help prevent any surprises.