Autumn Budget 2025 – Inheritance Tax (IHT) Breakdown

Under current rules, assets that qualify for 100% business property relief (BPR) or agricultural property relief (APR) have an unlimited amount of benefit. The original intention of these reliefs was to avoid the breakup of a family business on the death of an owner if their beneficiaries had to sell assets to pay the IHT due. It is a valuable relief, and the IHT saving on large estates can run into £ millions at present.

In last year’s Budget, it was announced that from 6 April 2026, there will be a new £1 million allowance introduced. This will be a combined benefit between agricultural and business property, with any excess above this limit qualifying for relief at the lower level of 50%, a tax rate of 20%.

For example, if an individual owns £1 million of assets that currently qualify for 100% APR and £1 million of assets that qualify for 100% BPR, on death after 5 April 2026, those assets will be combined, so £1 million would get 100% relief from tax and the remaining £1 million would only get 50% relief. The result is an increase in IHT from zero to £200,000.

In the initial announcements last year, the £1 million 100% allowance was to apply to each individual transferor – so spouses/civil partners would each need to own £1 million of qualifying assets to use the allowance. However, it has been announced in the Budget 2025 that the £1 million allowance will be transferable between spouses/civil partners if unused on the first death in the same way as the nil rate band and residence nil rate band, even if the first death occurred prior to April 2026.

Despite the easement, this reduction in the allowance could have significant and wide-ranging implications on some estates and will require some careful planning to try and mitigate the impact.

As the changes will only affect deaths occurring after 5 April 2026, there is still time to plan and make transfers of assets. This is a complicated area, and we would urge you to take professional advice before taking any action. Anti-forestalling was included alongside the Budget, so if you transfer agricultural or business property on or after Budget day and die on or after 6 April 2026 and within 7 years of transfer, the new £1 million allowance will still apply.

It is also important to consider the Capital Gains Tax (CGT) consequences of transfers. The transfer of assets is typically a disposal for CGT purposes, so transferring will cause any gain on the assets to become chargeable, and consequently, there could be a significant CGT liability to consider.

Despite the welcome news of transferability of the allowance to spouses, the new APR / BPR limit of £1 million has been widely criticised as being too low.

While there is still 50% relief above the £1 million limit, it could still have a destabilising impact on businesses above this level.

At last year’s Budget, there was also a change to the 100% business property relief available for quoted shares designated as ’not listed’ on recognised stock exchanges. This will apply in particular to shares on the Alternative Investment Market (AIM).

On transfers or death after 5 April 2026, relief will be given at the 50% rate with no £1 million allowance as for other BPR, APR qualifying assets. Anyone who holds AIM shares should review their individual situation, as this will mean a 20% tax charge on death from April 2026.

If it is important to you to maximise the legacy passed down to the beneficiaries of your Will by minimising any exposure to Inheritance Tax, then our financial planners can work with you to ensure you can do this while ensuring your own financial security.

Gifting

Despite changes to gifting being widely discussed in the media in the lead-up to the Budget, the normal rules of gifting were left unchanged, at least for now.

Potentially exempt transfers (PETs) are gifts to individuals to remove money from your estate. PETs allow you to gift an unlimited amount during your lifetime, direct to anyone you wish. If you live for seven years after the gift, it will be outside of your estate for IHT purposes.

Sometimes we underestimate the attraction of this benefit, certainly for those who are in good health. Our Wealth Management service looks to identify the wealth you will need to support your lifestyle throughout your lifetime, and it is important to retain enough for your own means. Many of our clients have surplus wealth in excess of this. It can be a difficult decision, but in the face of rules changing in the future, you may like to consider giving more now as protection against gifts being limited or taxed in the future. There are a number of reasons why you may not wish to pass significant wealth to your family now. Some control can be retained when giving the money away by using trusts.

Chargeable lifetime transfers occur when you are gifting money indirectly to people, via a trust. This may give you greater control over the money, but there are lifetime IHT charges that may be due for larger transfers, or if you have already made certain gifts. Again, you will need to live for seven years for the gift to become fully outside your estate.

Typically, these gifts are limited to £325,000 for an individual, £650,000 for a couple, as this amount is within the IHT nil rate band, so there will not be an immediate charge to lifetime IHT.

Normal expenditure out of income exemption.  Allows you to gift income that is surplus to your requirements and which is potentially outside of your estate immediately. Such regular gifts can be made directly to an individual, or it may be more desirable to make regular contributions indirectly to a beneficiary’s pension, for instance or even a Trust.

There are certain rules that will need to be followed to ensure a successful claim for gifts to be treated as being regarded as normal expenditure out of income during your lifetime. HMRC states that a gift:

• Formed part of the transferor’s normal expenditure

HMRC will look for evidence that there is a regular pattern to the gift, perhaps by setting up a direct debit

• Was made from income

The gift cannot be made from capital or capital assets, like jewellery

• Left the transferor with enough income for them to maintain their normal standard of living

Your personal representatives will have to provide calculations to HMRC of income and expenditure for each tax year considered to determine the surplus income amount and may have to prove these numbers if challenged. The income amount may not be the figure used for an Income Tax calculation, i.e. income from an Individual Savings Account (ISA) can be included.

If you have family or friends who may be impacted by any of the changes in the Budget, we have an enquiry service: The Financial Health Check, which can give an initial indication of whether advice should be sought. You can find details of this service here Old Mill Health Check Flyer

If you have any questions or want to discuss your individual circumstances with an Old Mill financial expert, please do get in touch.