UK inheritance tax (IHT) receipts have been on an upward path for 20 years, a trend that is expected to accelerate over the coming years. HM Revenue & Customs figures reveal that the inheritance tax collection for the first seven months of this tax year hit £5 billion – half a billion more than the same period last year and yet another record high.
Inheritance tax receipts totalled a record £7.5 billion for the 2023/24 tax year and are set to breach £8 billion this tax year, possibly reaching up to £8.5 billion. Currently, one in 20 people (5%) pays UK inheritance tax, but this is expected to almost double to 9.5% by 2030.
Inheritance tax reforms on the way
The 11% increase in receipts from April to October occurred before the new inheritance tax measures announced in the budget are implemented. The following reforms will considerably increase IHT receipts for the government.
Inheritance tax thresholds
The freeze on inheritance tax thresholds has been extended from April 2028 to 2030. The main nil rate band has remained at £325,000 since 2009. If it had risen in line with inflation, it would be approximately £500,000. The residential nil rate band has been frozen at £175,000 since 2021. It would be around £210,000 if it kept pace with inflation.
Agricultural and business property reliefs
The agricultural relief and business property relief will become less generous starting in April 2026. Currently, qualifying assets can receive relief of up to 100%, but from April 2026, it will only apply to the first £1 million of combined agricultural and business property. A 50% relief will apply to assets above this, effectively reducing the IHT rate from 40% to 20%.
AIM shares
Qualifying AIM (Alternative Investment Market) shares are currently exempt from inheritance tax once you have owned them for two years. From April 2026, they will be subject to inheritance tax at a reduced rate of 20%.
Pensions to lose IHT exemption
While inheritance tax is assessed on most of your worldwide wealth, most pension funds are excluded. But in a significant change impacting many families, from April 2027, inherited pensions will be liable for inheritance tax. This is in addition to the income tax levied on the beneficiary, so your heirs could pay an effective total rate of 67% on the balance of the fund, if you die after age 75.
Inheritance tax and expatriates
Inheritance tax has been determined by domicile status, rather than tax residence status. British expatriates, therefore, remain liable for this UK tax on their worldwide assets long after leaving the UK, often permanently.
From April 2025, the domicile regime will be replaced by a system based on long-term residence. Expatriates and those leaving or returning to the UK will have more certainty about their tax position, and many will benefit from the reform.
Leaving the UK: You remain liable for inheritance tax on non-UK assets for up to 10 years, depending on how long you lived in the UK before departing. For most UK nationals retiring abroad, it will be the full 10 years.
Moving back to the UK: Once you have been resident in the UK for 10 out of the last 20 years, your worldwide estate will be assessed for inheritance tax.
UK assets: Any assets you own in the UK are always assessed for inheritance tax, regardless of how long you live abroad. From April 2027, this will include your UK-registered pension funds. Perhaps now is the time to think about moving assets out of the UK.
Protect your family
It’s clear that strategic estate planning has become more urgent if you want your family to benefit from as much of your estate as possible. Each year, more and more families fall into the inheritance tax net, which will escalate when pensions are included. You may need to revise your estate plan following the Budget.
Make sure to structure your estate to optimise the available reliefs and to maximise the ability to transfer unused nil rate bands to your spouse or civil partner. Potentially exempt gifts (PETs) may work for your family, but once you give an asset or money away, you lose control over it, so be certain it is the right option for you.
Estate planning is complex. Professional financial advice will be incredibly beneficial to ensure your estate is managed efficiently, your wealth is transferred according to your wishes, and your loved ones receive the maximum possible inheritance.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
|| features@algarveresident.com
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).
www.blevinsfranks.com
