Chancellor Rachel Reeves has announced a significant overhaul of inheritance tax regulations, projecting that these changes will yield an additional £2 billion for the government each year. The new measures, revealed during the recent budget announcement, will for the first time impose inheritance tax on inherited agricultural assets surpassing the £1 million mark. This decision has elicited strong reactions from the farming community.
Understanding Inheritance Tax Inheritance tax is currently levied at a rate of 40% on the estate of a deceased individual—encompassing property, possessions, and monetary assets—exceeding a threshold of £325,000.
Importantly, the tax is applicable only to the amount that exceeds this limit. For instance, for an estate valued at £335,000, tax would be calculated only on the additional £10,000. The chancellor confirmed that this threshold will remain unchanged until 2030. It is essential for heirs to settle the inheritance tax within six months following the death to avoid accruing interest, which can otherwise increase the amount owed. Presently, inheritance tax contributes about £7 billion to government revenues annually. #### Statistics on Inheritance Tax Payments Latest statistics indicated that just over 4% of estates, approximately 27,800 annually, are subject to inheritance tax.
However, prior to the announced changes, economists from the Institute for Fiscal Studies (IFS) projected that the percentage of estates liable for the tax could rise to around 7% by 2032. A survey conducted by YouGov for The Times in July 2023 revealed that one-third of respondents believed their families would be liable for this tax upon their passing.
Current Exemptions and Allowances in Inheritance Tax Various exemptions and allowances exist regarding inheritance tax, particularly for individuals passing on their homes to children or grandchildren. These include:
Estates valued below the £325,000 threshold, which remains unchanged until 2030.
Transfers to a spouse, civil partner, or certain charitable organizations, which are exempt from tax.
In addition to these general exemptions, considerable allowances apply. For those who bequeath their home to children or grandchildren, the threshold effectively rises to £500,000. Married or civil partners can transfer their unused tax allowances, which can mean that an estate can be exempt from taxation on amounts up to £1 million when passing a home to their heirs.
Changes Affecting Family Farms Beginning in April 2026, family farms will be subjected to inheritance tax for the first time if the agricultural assets exceed £1 million. Under current law, such assets, including farmland, farm buildings, and residential properties, have traditionally been exempt. The updated guidelines will maintain a non-taxable amount of £1.325 million (the current threshold plus the family allowance) before the 20% inheritance tax applies to the excess—half the standard tax rate. Should a farmer be married, they can utilize the general exemptions to inherit assets tax-free or designate a primary residence to children or grandchildren. As such, the total accumulated exemption for married farming couples could reach £3 million.
Although the government suggests that the changes will primarily impact the wealthiest 500 farms annually, industry associations like the National Farmers Union (NFU) and the Country Land and Business Association (CLA) believe that up to 70,000 farms might feel the effects. Many farmers have expressed feelings of betrayal, leading to protests against the impending reforms.
Additional Inheritance Tax Revisions In her budget speech, Chancellor Reeves outlined further alterations to inheritance tax procedures. Starting in April 2027, inherited pensions will also be considered taxable, and shares listed on the AIM stock exchange within estates will be assessed at a 20% tax rate.
Gifting Money Before Death Individuals retain the ability to gift up to £3,000 annually without incurring tax liabilities, with any unused portion carry-forward to a maximum of £6,000 in subsequent years. Notably, gifts funded by income rather than savings are exempted from inheritance tax. Additional allowances also support wedding gifts. However, if an individual gives a substantial amount and passes away within seven years, that sum could be factored into the inheritance tax calculations.
The Role of Trusts in Inheritance Tax Planning Establishing a trust in favor of a child can shelter assets from inheritance tax, as the parent technically no longer owns these assets. Various types of trusts come with specific regulations, necessitating independent advice to navigate the complexities involved.
The UK government offers extensive resources about inheritance tax, including a dedicated helpline and guides available through HM Revenue and Customs and the MoneyHelper website. In summary, the proposed changes to inheritance tax aim to enhance government revenue while sparking significant debate across impacted sectors, particularly agriculture.
