In-Depth Analysis: Changes to Inheritance Tax in Rachel Reeves’s Autumn Budget

Chancellor Rachel Reeves’s first Autumn Budget brought a range of changes to UK tax policy, with a particular emphasis on reshaping inheritance tax (IHT) rules. The revised IHT regulations reflect the government’s commitment to raise funds for public services and invest in the economy, but they could also have significant implications for many individuals and businesses. This article delves into the key changes to inheritance tax announced in the budget, the rationale behind these adjustments, and what they could mean for estates, individuals, and business owners.

Key Changes to Inheritance Tax

1. Freezing of the Inheritance Tax Threshold

   • The standard inheritance tax nil-rate band (NRB), currently set at £325,000, has been frozen since 2009. This threshold allows estates to pass on up to £325,000 tax-free, with any value above this amount taxed at 40%.
   • In the Autumn Budget, Chancellor Reeves announced that this threshold freeze would be extended until at least 2030. With inflation and rising property values, the real value of this threshold has significantly eroded over time, meaning more estates will exceed the NRB and become liable for inheritance tax.

2. Residence Nil-Rate Band (RNRB) Remains Unchanged

   • The Residence Nil-Rate Band, an additional tax-free allowance for family homes, remains at £175,000 per individual. When combined with the standard NRB, it allows parents to pass on up to £500,000 to their descendants tax-free, or £1 million for married couples or civil partners.
   • Like the general NRB, the RNRB threshold will remain frozen. As a result, with house prices continuing to increase, more estates will exceed this level and become subject to inheritance tax over time.

3. Removal of Inheritance Tax Reliefs on Business and Agricultural Property

   • One of the most notable changes in the budget is the removal of certain tax reliefs for business and agricultural properties. Previously, business owners and farmers could pass on their businesses or farms to heirs largely tax-free through Business Property Relief (BPR) and Agricultural Property Relief (APR).
   • Under the new rules, from April 2026, these reliefs will be capped at £1 million. Any value exceeding this amount will now be subject to a 20% inheritance tax rate, rather than the standard 40% rate.
   • This cap could impact small and medium-sized business owners who may now need to rethink succession planning strategies and possibly prepare for higher tax liabilities on the value of their assets.

4. Taxation of Inherited Pension Pots

   • Another significant change is the decision to tax inherited pension pots. Previously, if the deceased was under 75 at the time of death, unused pension funds could be passed to beneficiaries tax-free.
   • Moving forward, inherited pension pots will form part of the deceased’s estate and be subject to inheritance tax. This means that pension assets could push some estates over the NRB, resulting in a higher overall tax burden.

The Financial Rationale Behind the Changes

The rationale behind these changes is clear: raising more funds for public services and addressing the growing budgetary needs. Freezing the IHT thresholds and capping reliefs on business and agricultural properties is expected to significantly increase tax revenues. This aligns with the government’s aim to raise over £40 billion through a variety of new tax measures to support public spending and investment. Inheritance tax is a particularly sensitive area, as it only affects a minority of estates (historically about 5%). However, the freeze and relief changes will gradually draw more estates into the tax net, with forecasts suggesting that up to 10% of estates could be subject to IHT by 2030.

Implications for Individuals and Families

1. Increased Tax Exposure

   • The freeze on the NRB and RNRB thresholds means that more estates will be subject to inheritance tax, as house prices and asset values continue to increase. This could impact families who may have previously assumed their estates would remain below the threshold, especially in areas with high property values.

2. Rethinking Pension Planning

   • The change in treatment of inherited pension pots introduces a new dimension to estate planning. Many individuals might need to reconsider their retirement and estate planning strategies, as pension assets can no longer be passed on tax-free.

3. Potential Impact on Family-Owned Businesses and Farms

   • Families who own businesses or farms could be significantly affected by the cap on BPR and APR. While a £1 million exemption remains, the value of many family-owned businesses and agricultural properties often exceeds this amount, meaning that heirs may now face a tax bill that could force the sale of assets or borrowing to cover IHT liabilities.

What This Means for SMEs and Business Owners

For SMEs and business owners, the reduction of BPR and APR reliefs may have substantial implications. Family-owned businesses, which traditionally benefit from these reliefs, will face a capped exemption, potentially leading to a substantial tax bill on the remaining value of the business or agricultural property. This could impact succession planning, especially for those wanting to pass on their business to the next generation without a heavy tax burden.

Business owners may need to explore new financial planning strategies to mitigate the tax impact, including establishing trusts or other structures that could help manage IHT liabilities. Professional advice will become essential for navigating these changes and ensuring that the business remains financially viable for future generations.

Conclusion: How Exchange Accountants Can Help

The changes to inheritance tax announced in Rachel Reeves’s budget make estate and succession planning more complex. With thresholds frozen and certain reliefs capped, individuals and businesses will need to carefully assess their financial positions and consider how best to manage potential tax liabilities. Exchange Accountants is here to help clients navigate these new rules with clarity and confidence. Our expert team can guide you through the intricacies of inheritance tax planning, advising on strategies to minimise tax liabilities, protect family assets, and ensure smooth business succession.

If you have questions about how the changes in the Autumn Budget might impact you, feel free to reach out to Exchange Accountants. Our team is dedicated to helping you make informed decisions and plan for the future effectively, whatever your circumstances.