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Significant changes to the UK’s Inheritance Tax (IHT) system are coming into effect on 6 April 2025. These reforms are designed to modernise taxation, close existing loopholes, and create a fairer distribution of tax responsibilities. This article breaks down what the changes entail and how they could impact your estate planning.
Key Changes to Inheritance Tax (IHT) from April 2025
1. Shift to Residence-Based Taxation 📍
The UK’s inheritance tax system will transition from domicile-based to residence-based taxation. Under this new framework, individuals who have lived in the UK for at least 10 out of the previous 20 years will be taxed on their worldwide assets, regardless of domicile.
Who’s affected?
- Long-term UK residents previously exempt due to non-dom status.
- Individuals leaving the UK, whose overseas assets may remain taxable for up to 10 years after departure.
2. Changes to Agricultural and Business Property Relief 🌾🏢
The current generous Agricultural Property Relief (APR) and Business Property Relief (BPR) will see a major overhaul:
- APR and BPR will be capped at £1 million.
- Any assets exceeding this threshold will incur IHT at a reduced rate of 20%.
Impact:
- Family-owned farms and businesses may face higher tax bills.
- Potential need to sell parts of estates or businesses to meet IHT obligations.
3. Pension Assets Inclusion 💷
From April 2027, previously exempt pension assets will now form part of the taxable estate, significantly altering estate planning strategies.
Implications:
- Increased IHT exposure for beneficiaries.
- Greater need for strategic pension fund management and estate planning.
Preparing for the New IHT Landscape 📝
To mitigate the impact of these changes, consider the following actions:
- Review your estate plan: Understand your current liabilities and how the new regulations might affect them.
- Seek professional guidance: Consulting an accountant or financial advisor will ensure you make informed decisions.
- Regular updates: Continuously monitor changes and adapt your strategies accordingly.
The upcoming IHT changes represent a significant shift in the UK’s taxation approach, affecting both domestic and international residents. Proactive planning is essential to minimise tax liabilities and secure your family’s financial future.