Pensions are not subject to the 40% rate that is included on the homes, possessions and assets of someone up to a £325,000 limit but, as predicted, that tax ‘tweak’ will change in two years.
The rate of inheritance tax will also remain at 40% for estates worth up to £325,000 for a further two years until 2030.
However, the relief on business and agricultural property will change from April 2026, which impacts families with farmland.
The 100% tax relief for the first million pounds of combined agricultural and business assets will remain, but a 50% rate on levels after that will be introduced. In 18 months, the rate of business property relief will go down to 50% for companies not listed on a recognised stock exchange.
The impact of the inheritance tax changes will not affect the “vast majority” of families, with the changes in business property relief impacting just 0.3% of estates each year, according to Reeves.
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She said: “The vast majority of estates currently pay no inheritance tax, and that will continue to be the case after the reforms announced at Budget.
“The Government recognises that people want to pass on their assets to their families, but the Government is making the inheritance tax system fairer by ensuring that wealthy estates contribute more to the public finances.”
Pension experts have cast their eye over the changes and how they will impact estate planning in the future.
‘Fundamental shift in wealthier individuals’ thinking’
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said the decision to bring pensions into the inheritance tax equation is “perhaps no surprise”.
Ambery said: “However, pensions have been seen as [a] useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.
“Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way. This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement.”
Ambery added: “At present, it makes more sense to access ISAs and other forms of saving before touching pensions. In time, we’re likely to see more pensions accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.
“The end result of this change is that many more people will now be brought into scope for IHT. While there could be some benefit to the Treasury, pensions are a long-term investment and it’s vital that large-scale changes to how they are taxed are well-managed to avoid any risk of undermining confidence in pensions and scaring people from engaging with their retirement savings.”
On the agricultural and property relief threshold, Sarah Coles, head of personal finance at Hargreaves Lansdown, said “it will help provide a level of protection for farmers and those passing down family businesses, while limiting the way rules can be used as tax planning tools”.
Coles added: “Business property relief has been an incredibly valuable tax break for AIM investors over the years, who could hold qualifying investments for two years and see them fall out of their estate for inheritance tax purposes. The cutting of this relief will mean it’s worth reassessing the role of these investments.
“There’s no need to panic, but it pays to… make sense as part of your overall portfolio. You also need to consider the impact if other investors are put off the AIM market because of a change in the rules.
“However, if you have invested in growing companies for the long term because you fundamentally believe in them, then the tax treatment is just one of a number of considerations when you’re deciding the right home for this portion of your portfolio.”
