As a business owner, you’re used to navigating complex financial rules. But are you prepared for the upcoming changes to Inheritance Tax (IHT)? In the 2022-23 tax year alone, IHT receipts reached a record £7.1 billion, and with significant reforms on the horizon, that number is set to evolve.
If you are confused by the IHT 421 form, our blog post, available here, demystifies its requirements and guides you through them step-by-step.
Understanding these shifts is crucial for effective estate planning. This guide will walk you through the key changes to Inheritance Tax, explain what they mean for your family and business, and outline how you can prepare.
What is Inheritance Tax?
Before we dive into the upcoming changes, let's quickly recap the current rules. So, what is Inheritance Tax (IHT)? It’s a tax on the estate—which includes the property, money, and possessions—of someone who has passed away.
Here’s how it works right now:
- The Nil-Rate Band (NRB): No IHT is due if the estate's value is below the £325,000 threshold.
- The Residence Nil-Rate Band (RNRB): If you leave your main home to your children or grandchildren, you get an additional £175,000 allowance. This means you could potentially pass on up to £500,000 tax-free.
- For married couples or civil partners: These allowances can be combined, often raising the total tax-free threshold to £1 million.
Any portion of the estate above these thresholds is typically taxed at a standard rate of 40%. As we've covered in our previous post on IHT, careful planning can help manage this liability.
What Are the Proposed Changes to Inheritance Tax?
Between 2025 and 2030, significant reforms are set to reshape Inheritance Tax (IHT). These upcoming changes will alter how IHT is calculated and applied, potentially bringing more estates into the tax net. Are you aware of how these shifts could impact your family's future? Understanding these reforms now is crucial for effective planning.
Here's a breakdown of what's to come:
| Timeline | Change | Key Details |
| From April 2026 | Capped Relief for Farms & Businesses | - APR/BPR relief capped at £1M for tax-free inheritance. - Assets above £1M taxed at 20% IHT rate. - Up to 70,000 farms may be affected (NFU estimate). |
| From April 2027 | Pensions Included in IHT | - Defined contribution pensions now part of estate value. - Taxed at 40% if estate exceeds thresholds. - Aims to prevent pensions being used as wealth transfer tools. |
| Until April 2028 | Frozen IHT Thresholds | - Nil-Rate Band: £325,000 (unchanged since 2009). - Residence Nil-Rate Band: £175,000. - Rising asset values = more estates liable ("stealth tax"). These reforms signal a clear shift in government policy, aiming to increase tax revenue from inherited wealth. With IHT receipts already around £6 billion a year, these changes could push that figure past £10 billion by 2030. |
Who Pays the Inheritance Tax?
It's a common misconception that the person receiving an inheritance pays the tax. In reality, the Inheritance Tax bill is paid by the estate itself before any assets are distributed to the beneficiaries. The executor of the will is responsible for valuing the estate, reporting it to HMRC, and settling any tax due.
This is an important distinction, as the upcoming changes mean the total value of many estates will increase, potentially leaving less for your loved ones after the tax is paid.
The Role of Gifting in IHT Planning
With stricter IHT rules on the horizon, many are turning to gifting as a way to reduce their estate's value. But how does it work?
Gifting can be an effective strategy, but it’s important to understand the rules.
- Annual Exemption: You can gift up to £3,000 each tax year without it being counted towards your estate. You can even carry forward any unused allowance from the previous year, potentially allowing for a gift of up to £6,000.
- Small Gift Exemption: You can give as many small gifts of up to £250 per person as you like each year, provided you haven’t used another exemption on them.
- The Seven-Year Rule: For larger gifts, you must live for seven years after making the gift for it to be fully exempt from IHT. If you pass away within this period, the gift may be taxed, with the rate decreasing between years three and seven ("taper relief").
Remember to keep clear records of any gifts you make. This will help the executor of your estate accurately calculate any tax due.
Navigating the New IHT Landscape
The upcoming inheritance tax changes make proactive estate planning crucial for business owners. These reforms are complex, but understanding your potential liability is the first step. Debitam can help business owners navigate these changes, offering clear guidance and practical strategies to manage your estate efficiently.
