What the October Budget means for inheritance tax planning

Under current rules, if you die before the age of 75, you can pass any money left in private pensions to your loved ones tax-free. If you die after age 75, the beneficiary will pay income tax on what they inherit, at their marginal rate.

These rules will remain in place. However, as part of the Budget announcement, effective from 7 April 2027, unused pension funds will be included in a person’s estate for IHT purposes.

If the value of a pension fund (when added to other assets) is below the IHT allowance threshold, nothing will change. Everybody has a personal allowance of £325,000 before any IHT is payable – though your allowance may be higher depending on your circumstances (see No change to IHT thresholds below).

In cases where the IHT threshold is exceeded, you can still pass your unused pension funds to your spouse, or civil partner free of IHT.

However, if the beneficiary is someone other than your spouse or civil partner and your estate is over the IHT threshold, they will pay income tax on the inherited pension at their marginal rate, after the IHT is deducted.

In both cases, if you die after age 75, your beneficiary will need to pay income tax on what they inherit, at their marginal rate.

Ultimately, pensions will still be the most effective way of accumulating funds for retirement.

However, it’s now likely that other tax-efficient investments, like Individual Savings Accounts (ISAs), could gain more relevance in an estate plan. There’s no tax relief on ISAs but, like pensions, they grow free from Income Tax and Capital Gains Tax. And you can withdraw 100% of an ISA tax-free – compared to 25% from a pension fund (the latter capped at £268,275).

Business Relief (BR), also known as Business Property Relief, is a relief from IHT that reduces the value of a business (or its assets) when calculating how much IHT is due.

Prior to the October 2024 Budget, 100% BR was available on unlisted shares in a qualifying trading company – or on a business or interest in a business – after two years of ownership.

Agricultural Property Relief (APR) effectively reduces the value of agricultural property when calculating how much IHT is due.

APR applies to land, pasture, and crops used for agricultural purposes, as well as farm buildings, farm cottages, and farmhouses. Prior to the October 2024 Budget, 100% relief was available after two years of ownership.

The government is reforming both business relief and agricultural property relief from 6 April 2026. The new rules, announced in the October Budget, limit 100% relief to the first £1 million of combined agricultural and business property assets. Assets above this amount are taxed at 20% (reduced from the standard 40%).

Investments held on the Alternative Investment Market (AIM), also currently benefit from 100% relief if held for two years. From April 2026 these will also be taxed at 20% ( reduced from Standard 40%), but they will not benefit from relief on the first £1 million.

These changes will impact some family businesses and farms. They will also impact a range of ‘packaged’ investment products that have been used for many years to shelter investors from IHT.

It’s worth a reminder of what’s not changing. The basic IHT allowance, or Nil Rate Band (NRB), remains at £325,000 per individual, with up to an additional £175,000 Residence Nil Rate Band (RNRB) to cover property left to children. What’s more, these allowances will remain frozen until 2030.

Married couples effectively still have a £1m maximum allowance (because they can inherit each other’s allowances).

The standard rate of IHT is 40%, which applies on the value of an estate above the available allowances.

The RNRB is tapered away at the rate of £1 for each £2 by which the total estate exceeds £2m.

If you think these changes will affect you, your first step should be to speak to your independent financial adviser. If you have an estate plan in place already, this is likely to require some attention.

IHT legislation is complex, as is pensions legislation. These changes could increase your tax liability and reduce the value of the estate you’re intending to leave your loved ones.

Your IFA will consider the most appropriate strategy for you, in view of your circumstances and goals. These may include making use of gift allowances, Trusts,or taking out a Whole of Life insurance policy, which pays out a lump sum on death that can be used to fund an IHT bill.

Given the reductions to Business Relief and Agricultural Relief in the Budget, some life cover may be essential to farmers, landowners, or business owners to avoid assets having to be sold when passing to the next generation.