The 2024 Autumn Budget introduced sweeping changes that have left families, retirees, and business owners across the UK grappling with how to protect their estates. These adjustments could affect not only high-net-worth individuals but also middle-income families who have worked hard to build their financial security.
As the government targets an estimated £2.3 billion in additional revenue by 2029, record numbers of estates will be caught by inheritance tax (IHT) as thresholds remain frozen, business and agricultural relief is capped and pensions are brought into the tax net. Here’s what these changes mean and how families can adapt their estate planning strategies in light of these shifts.
Record Number of Families to be Affected by Inheritance Tax due to 2024 Budget Changes
A record one in 10 families are set to be impacted by inheritance tax by 2029. Currently, only about 5% of estates face inheritance tax. This number is set to double within five years, largely due to the freezing of IHT thresholds, the cap on certain reliefs and the addition of pension pots to the IHT regime.
Key Changes and Impacts
Threshold Freeze Extended: The IHT threshold will remain frozen at £325,000 until 2029-30. With property and asset values rising, this freeze means more estates will exceed the threshold and become liable for IHT.
Pensions Brought into IHT: From April 2027, pensions will no longer be exempt from IHT. This change is expected to bring in around £1.5 billion, but it could lead to a significant tax burden for families. Pension pots could face tax rates as high as 67% on inherited funds due to the combined effect of IHT and income tax.
Impact on Families and Beneficiaries
With these changes, families who may not have previously considered IHT as a concern may now face significant tax implications. Children inheriting pension pots could be taxed twice—first with a 40% IHT charge on the pension fund, and then at their income tax rate when they withdraw funds. However, these changes could also lead to unintended consequences. Many pensioners may now be incentivised to spend down or withdraw pension funds earlier than planned, potentially jeopardising their long-term financial security.
2024 Budget Reforms to Agricultural and Business Property Reliefs
The Budget also brought reductions to Agricultural Property Relief (APR) and Business Property Relief (BPR), which have been lifelines for farmers and small business owners.
Relief Limitations
Caps on Relief: Relief is now limited to only the first £1 million in value, and any amount above that will only receive 50% relief. This could have a significant impact on families who own agricultural land or family businesses that exceed these thresholds.
Implications for Farmers and Business Owners: For families with farms or small businesses, the changes mean they may now face IHT on previously exempt assets, potentially forcing them to sell parts of their business or land to cover the tax bill.
This adjustment has already sparked backlash from the farming community and business advocates, who argue that the change threatens the financial sustainability of family-owned enterprises.
Navigating the IHT and Pension Changes: What Can You Do? The 2024 Budget Aftermath
With these changes, estate planning has become more critical than ever. Here are a few strategies to consider:
Adjust Estate Planning for Business and Agricultural Assets
Trusts for Business Succession: For business owners, setting up trusts might help manage the tax implications on business assets, although careful structuring is needed to meet new IHT criteria.
Strategic Gifting and Succession Planning: Gifting parts of a business or agricultural land during one’s lifetime may also be an effective way to reduce future IHT liabilities, as long as it aligns with the seven-year rule for exempt transfers.
Consider Trusts and Gifting Strategies
Lifetime Gifting: Gifting assets during your lifetime can reduce your estate’s IHT liability, though it’s crucial to consider the seven-year rule to avoid unexpected tax implications.
Utilise Trusts: Trusts can provide a way to pass on assets while potentially reducing IHT. By placing assets into a trust, you may be able to protect family wealth from the 40% IHT rate. However, trusts come with their own tax rules, and careful planning is essential.
Capital Gains Tax (CGT) Changes
Capital Gains Tax is levied on the profit made when selling or transferring certain assets, including property (other than a primary residence), investments, and businesses.
Lowered CGT Exemptions
The annual CGT exemption has been reduced to £3,000 per individual, down from the previous £6,000. This change means that individuals selling assets such as second homes or shares will be liable for CGT on gains above £3,000.
Impact on Estate Planning: For individuals with investment properties or shares, this lower exemption could significantly affect gifting strategies, particularly if they planned to pass assets to family members over time.
What This Means for You
Consider Trusts and Other Structures: Trusts, particularly Discretionary Trusts, may offer tax-efficient ways to pass on assets without triggering immediate CGT.
Reevaluate Gifting Strategies: With the reduced exemption, it might be beneficial to consult an estate planner to review your assets and determine the best time to make gifts or transfers.
Broader Implications and the Need for Proactive Planning
The changes in the 2024 Budget underscore the importance of revisiting your estate planning regularly, especially given that tax laws are evolving. As more estates fall within the IHT net and families face unprecedented tax burdens on inherited pensions, businesses and farming assets, taking proactive steps now can help safeguard your wealth and ensure your loved ones are protected.
In Summary: Key Takeaways for Estate Planning
Pensions and IHT: The inclusion of pensions in the IHT regime could have a profound impact on families. Consider withdrawing pensions strategically or looking into annuities as an alternative.
Relief for Agricultural and Business Assets: With changes to APR and BPR, farmers and business owners need to assess their options, including trusts and gifting strategies, to minimise IHT.
Stay Informed and Plan Proactively: Given the ever-changing landscape of tax laws, it’s vital to consult with estate planning professionals to adapt to new rules and protect your family’s financial future.
The 2024 Autumn Budget has shifted the landscape of estate planning, and individuals need to stay vigilant and adaptable. At Toucan Law, we’re here to help guide you through these changes and provide tailored solutions to secure your legacy. Contact us to learn more about how you can protect your wealth and ensure your estate plan aligns with the latest tax regulations.
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