Finding shelter amidst Budget shifts

This article is taken from the spring 2025 edition of Equinox. You can view the full magazine here.

The first Budget delivered by new Chancellor, Rachel Reeves, raised some questions about Inheritance Tax (IHT), and has highlighted the importance of good estate planning.

As you may know, the first £325,000 of an individual’s estate is exempt from IHT thanks to the ‘nil rate band’*. Any amount above this is taxed at up to 40%. If you’re married or in a civil partnership, you can pass your entire estate to your spouse tax-free, preserving your nil rate band, which can then double to £650,000.

The residence nil rate band, introduced back in 2017, also potentially lets your estate claim an additional £175,000 IHT allowance, if you’re planning on leaving your family home to your direct descendants (either your children or grandchildren). The amount that can be claimed is gradually reduced for estates over £2 million, and for every £2 over the threshold, it decreases by £1. Importantly, this reduction applies to the total estate value, not just the family home.

That’s the current state of things. But the Chancellor made three big announcements in last October’s Budget that will affect how IHT is charged, what counts as part of someone’s estate, and how much some families will have to pay.

So, what’s changing?

Let’s start with what’s staying the same. Last year’s Budget confirmed both the nil rate band and the residence nil rate band will stay at current levels until 6 April 2030. Given the nil rate band was frozen at £325,000 in 2010, it just hasn’t kept up with higher house prices, inflation or salaries. Today, most people’s wealth is tied up in the value of their home; keeping IHT allowances frozen will mean many more families are caught in the IHT trap.

The Chancellor also announced that from April 2027, unspent pension pots will be included in a person’s estate for IHT purposes. This means any amount over the current IHT allowances will be taxed at 40%. This change is likely to catch out a lot of families where unspent pensions were not part of their estate planning. If you or your spouse has a significant pension pot, you might want to talk to Equilibrium to discuss how this change could affect you.

There’s also a sting in the tail when it comes to making IHT payments. Estates have a timeframe of six months from the death of the deceased to pay any IHT due before interest starts accruing. From April 2025, interest on late IHT payments will increase by 1.5 percentage points to 4 percentage points above the Bank of England’s base rate (currently 4.5%). That could make life difficult for families who have to sell assets to help pay the IHT bill.

Changes to Business Relief

Finally, there’s another important change to be aware of. Business Relief has been around since the 1970s, and was introduced to help owners of family businesses to pass them down from one generation to the next without facing a hefty IHT bill. Today, provided the business meets the qualifying criteria, Business Relief can be claimed on privately-owned (or ‘unquoted’) businesses, and firms listed on AIM (the Alternative Investment Market), among others, making it a widely used part of estate planning.

An estate can claim IHT relief on a business, business interest, or shares in a qualifying company if the deceased owned them for at least two years. Previously, Business Relief was 100%, but from 5 April 2026, this will change:

• For unquoted companies: the first £1 million of assets that qualify for Business Relief will attract no IHT at all, while anything over £1 million will be eligible for 50% relief.
• For AIM-listed companies: shares in Business Relief qualifying companies listed on AIM will be eligible at a reduced rate of 50%.

Estate planning can help

The good news is that changes to Business Relief are likely to affect relatively few estates when introduced. In fact, Business Relief might become a welcome addition to your estate planning.

According to HMRC, out of the 4,170 estates that claimed Business Relief in the 2021/22 tax year, the vast majority (88%) made claims of £1 million or less. In fact, most estates, being able to claim 100% IHT relief on the first £1 million invested, and 50% relief on anything over that amount, will still significantly reduce the amount of IHT due on the overall value of the estate. It could prove very helpful in cases where unspent pensions may result in an unplanned potential IHT bill.

Important information

Tax treatment depends on the individual circumstances of the investor and is subject to change. This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.

*The nil rate band is the threshold below which no Inheritance Tax (IHT) is payable on an individual’s estate.

This blog is intended as an informative piece and should not be construed as advice.