Among the many rumours surrounding the upcoming 2025 Budget, proposed changes to the UK’s Inheritance Tax regime have dominated the headlines.
While any discussion at this stage remains speculative, several potential reforms have been reported in the press, including:
- Lifetime gifting cap: the Government is reportedly considering a lifetime cap on the value of gifts that can be made free of IHT. Currently, gifts to individuals of any amount are potentially exempt if the donor survives for 7 years.
- Changes to the 7-year rule: the time frame for potentially exempt transfers could be extended beyond 7 years, with some commentators suggesting a period of 10 or even 14 years.
- Reform of gifting exemptions: Reviews or potential restrictions could be introduced for existing exemptions, such as the £3,000 annual gift allowance.
- Further changes to reliefs: the Government may continue to restrict or remove other IHT reliefs, especially if they are deemed unfair or costly to the taxpayer.
- Flat-rate IHT: some analysts suggest the Government may consider a simplified flat-rate IHT regime, potentially replacing the current ‘cliff edge’ 40% rate with one applied more broadly.
The rumoured changes are in addition to those already announced, which include:
- New residency-based tax system: since 6 April 2025, the non-dom regime has been abolished and replaced with a residence-based system. This could bring the worldwide assets of long-term UK residents within the scope of IHT after only 10 years of residence.
- Changes to business and agricultural relief: from April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) at the rate of 100% will be capped at a combined value of £1 million. Assets with a value above this amount receive relief at 50%.
- Changes to pensions from April 2027: most unused pension funds will form part of an individual’s taxable estate for IHT purposes. While the rules are still to be confirmed, this represents a very significant shift, as private pensions have historically been exempt from IHT.
- Thresholds frozen until 2030: the nil-rate band of £325,000 and the residence nil-rate band of £175,000 have been frozen until at least April 2030. Due to inflation and rising asset values this will bring more estates into the IHT net.
Possible pre-Budget actions
If you have significant pension savings, own a business, or hold agricultural assets, you should consider reviewing your estate planning arrangements.
Key considerations should include:
- Review your Will or Draft one if you do not have one: your Will can be structured to maximise allowances, especially given the new cap on BPR and APR and its “use-it-or-lose-it” nature for spouses and civil partners.
- Consider lifetime gifts: given the rumoured changes to the gifting rules, consider making gifts sooner rather than later to start the 7-year clock under the current regime.
- Reassessing your pension strategy: in conjunction with taking financial advice, you may consider spending pension funds in priority to other monies and examine other strategies to reduce the impact of the April 2027 changes.
- Reviewing the tax exposure of any family trusts: the new cap on reliefs will significantly affect both existing and new trusts.
- Assess Investments: Investors may wish to review holdings such as AIM shares, which may currently benefit from reduced rates of Business Property Relief (BPR).
For more information about the upcoming Autumn Budget, please contact us: advice.uk@dixcart.com.
