Rachel Reeves has confirmed major changes to Inheritance Tax as part of her Autumn Budget.
Inheritance Tax is sometimes paid on the "estate" of someone that has died - this includes property, possessions and money. But under the current rules, very few people end up paying it - in fact, currently less than 5% of estates are currently subject to Inheritance Tax. The tax still raises about £8billion a year.
Inheritance Tax is only due for wealth transferred within seven years of death. If there is Inheritance Tax to pay, the standard rate you pay is 40% above anything above threshold, which is normally £325,000 - although this is often higher depending on who you leave your estate to. For example, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner.
In her Budget today, Rachel Reeves revealed the current Inheritance Tax thresholds will remain frozen by a further two years until 20230. But she also revealed inherited pensions will be subject to Inheritance Tax and included in someone's "estate" from 2027. Under current rules, if you die before the age of 75, the person inheriting your pension will not have to pay tax on your retirement savings.
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If you die after the age of 75, those who inherit your pension will pay Income Tax when they draw from it, as it will be treated as income. There will also be reforms to Agricultural Property Relief and Business Property Relief. You will continue to pay no Inheritance Tax on the first £1million of combined business and agricultural assets - but from April 2026, assets over this amount will be given a 50% relief, which means an effective rate of 20% Inheritance Tax.
Rachel Reeves said: "Only 6% of estates will pay Inheritance Tax this year. I understand the strongly held desire to pass down savings to children and grandchildren, so I am taking a balanced approach in my package today."
Under current rules, if you give away your home to your children - this includes adopted, foster or stepchildren - or grandchildren, then the Inheritance Tax threshold can increase to £500,000. This includes the basic £325,000 allowance, plus an additional £175,000. If you are married or in a civil partnership, any Inheritance Tax allowance that isn’t used can be passed on when someone dies.
This means a couple can potentially pass on as much as £1million without their estate being subject to Inheritance Tax. There are also ways to reduce how much Inheritance Tax is paid on your estate. Your rate of Inheritance Tax on some assets is reduced from 40% to 36% if you leave at least 10% of the net value after any deductions to a charity in your will.