The Autumn Budget 2024 introduced several unexpected provisions regarding Inheritance Tax (IHT) that significantly impact individuals whose estates are likely to exceed the tax threshold upon death.
Inheritance Tax is charged at a flat rate of 40% on estates worth more than £325,000. While some exemptions exist — such as transfers between spouses or civil partners — leaving everything to your partner may only defer the tax, potentially increasing the future IHT burden for beneficiaries.
Below, we explore the options available through lifetime gifting to minimise your exposure to Inheritance Tax. Before estate planning, it is important that we first consider the changes introduced in the Autumn Budget 2024.
IHT Changes: Autumn Budget 2024
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Nil-Rate Band Freeze Until 2030
The nil-rate band of £325,000 has been frozen until 2030. It had already been frozen by the previous government until 2028. The Chancellor’s Autumn Budget 2024 extended that freeze until 2030. That means if your net estate is over £325,000, it will be subject to IHT.
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Unused Pensions Subject to IHT From April 2027
Currently, unused pension funds fall outside the estate for IHT purposes. Many individuals who do not need to use their pensions will distribute them to others after their death, as it is an efficient way to pass on their wealth. However, from April 2027, unused pension funds will be treated as part of the estate and will be subject to IHT.
The government has launched a technical consultation to determine how this will work in practice.
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Agriculture Relief & Business Property Relief Changes
Currently, farmers and businesses are entitled to 100% relief on their business assets, which means these assets are not subject to IHT. However, from April 2026, any agricultural or business assets over £1 million will be subject to IHT at a reduced rate of 50% of the current rate. This means IHT will be charged on those assets over £1 million at a rate of 20%.
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Residency-Based IHT for Former “Non-Doms”
The Autumn Budget 2024 abolished the “non-dom” status and introduced a residency-based system. A foreign national who has lived in the UK for at least 10 out of 20 tax years will be treated as a “long-term resident”. Once this status is established, their worldwide assets will be subject to UK IHT. Prior to this budget, their foreign assets were excluded from IHT calculations. This will also impact offshore trusts: any assets placed in an offshore trust, whilst the long-term resident held non-dom status, will now be included in the estate for IHT purposes.
Reducing IHT: Lifetime Gifting
Lifetime gifting is an effective way to help reduce IHT liability. Disposing of assets through gifting could potentially reduce your exposure to IHT by reducing the value of your estate. However, there are certain requirements you must fulfil to avoid paying IHT.
Taper Relief – The 7-Year Rule
If you gift property, assets or investments more than seven years before you die, these will no longer be considered part of your estate. These are known as ‘potentially exempt transfers’ (PETs). To qualify as a PET, they must meet specific criteria to be excluded from IHT calculations.
Potentially Exempt Transfers: According to HMRC, a potentially exempt transfer (PET) is a transfer of value made during a person’s lifetime that meets the following three conditions:
- It is made by an individual on or after 18 March 1986.
- It would be considered a chargeable transfer if not for Section 3A of the Inheritance Tax Act 1984 (or, if only partially chargeable, the portion that would be chargeable is treated as a PET).
- It is a gift made to another individual or a qualifying trust.
In essence, the transfer must be a gift made during the donor’s lifetime to an individual or a specified trust, and it must be of a kind that would normally be subject to IHT. Gifts between spouses are not considered PETs, as they are already exempt from IHT.
If the donor is alive for at least seven years after making the gift, its value is excluded from their estate and is no longer subject to IHT. However, to qualify, the donor must completely relinquish control or benefit from the gift.
Gifts With Reservations
A gift with reservation arises when the donor gives away an asset but continues to derive some benefit from it. A common example is when a parent transfers ownership of the family home to their children but continues to live there without paying rent. Although legal ownership has been passed on, the donor still benefits from the property by residing in it. In such cases, the value of the property is still considered part of the donor’s estate for IHT purposes.
Additional Gift Exemptions
There are several IHT exemptions available for lifetime gifts:
- Annual Exemption: You can gift up to £3,000 each tax year to anyone you choose without it being subject to IHT. If unused, this exemption can be carried forward for one year.
- Wedding Gifts: You may also gift:
- £5,000 to a child,
- £2,500 to a grandchild, and
- £1,000 to any other individual,
on the occasion of their marriage or civil partnership.
- Small Gifts Exemption: You can make unlimited gifts of up to £250 per person per year, provided the recipient hasn’t also benefited from your annual exemption.
Gifts to Charities
All gifts made to registered charities are exempt from IHT, whether given during your lifetime or through your will. Furthermore, if you leave at least 10% of your estate to charity, the IHT rate on the remainder of your estate is reduced from 40% to 36%. This can result in significant savings, especially for larger estates.
Estate Planning Following the Autumn Budget 2024
While the fundamental rules around gifting remain unchanged, the Autumn Budget 2024 introduced significant updates. Certain assets that were previously outside the scope of IHT are now included within the taxable estate. As a result, your estate planning strategies may need to adapt.
- Regular Lifetime Giving: As long as gifts are made without reservation of benefit, this remains one of the most effective ways to reduce your estate’s taxable value.
- Using Pension Funds: If you have unused pension funds, it may be tax-efficient—depending on your circumstances—to withdraw and gift part of the fund. While this could incur an income tax charge, it may help reduce the IHT liability on your estate.
- Agricultural and Business Property Relief: The recent changes make planning in this area more complex. If these assets are essential to your business, you must carefully consider how to transfer ownership. Continuing to work in the business after transferring ownership could result in the gift being classified as one with reservation, potentially bringing it back into your estate for IHT purposes. Although the government states that reliefs for agricultural and business property can be worth up to £3 million, in practice, this level of relief is only available in very specific situations.
It is essential to seek expert legal and financial advice before making any decisions to mitigate IHT. Mistakes in estate planning or lifetime giving can lead to unintended consequences, including assets being brought back into your estate and becoming liable for IHT.
At Howell Jones our Wills and Probate team is on hand to advise. Get in touch with our Surrey solicitors today for professional guidance and support.
