Effective as of 6 April 2025, the following changes will be implemented on Inheritance Tax (IHT)
1. Inclusion of Pension Assets in IHT
Under the current rules, pension assets are generally outside the scope of IHT. However, from 6 April 2027, the government plans to include unused pension funds and certain death benefits within an individual’s taxable estate. This change raises concerns over whether life insurance policies written in trust, which have historically been exempt from IHT, will now be subject to taxation. While detailed guidance is awaited, preliminary reports suggest that only death benefits arising from pension funds, rather than life insurance proceeds held in trust, will be affected. However, individuals should review their estate planning to ensure continued IHT efficiency.
Implications:
- This change may significantly impact estate planning, as pensions have traditionally been used as an effective inheritance tax shelter.
- Individuals should consider withdrawing funds strategically or restructuring their pensions to minimize potential tax exposure.
2. Introduction to Long-Term Resident (LTR) Status
Individual will be classified as an LTR if they have been a UK tax resident for 10 or more of the last 20 tax years. They will be liable for inheritance tax (IHT) on their worldwide assets, regardless of domicile status.
Even if they stop being a UK resident, the IHT exposure on worldwide assets will continue for 10 years following their departure from the UK; called the ‘Tail Rule’.
Tail Rule Calculations
- 10 years or more of the last 20 tax years prior to 6 April 2025 – Full 10 year tail
- Less than 10 years of the last 20 tax years prior to 6 April 2025 – Proportional tail i.e. 2 years of tax years is a 2 year tail, 8 years is an 8 year tail etc.
- Individuals that gain UK residency after 6 April 2025 will have a standard 10 year tail once they have accumulated the 10 qualifying years
Implications:
- Individuals who have been living in the UK for an extended period, including those previously benefiting from the non-domicile regime, will see a dramatic increase in their IHT exposure.
- Those planning to emigrate from the UK must factor in the 10-year tail when structuring their estate planning.
- Non-UK assets held in trusts by former UK residents could now fall within the UK IHT net if the settlor was classified as an LTR at the time of departure.
3. Changes to Estate Valuation
The Government has announced it will include some pension benefits (currently tax-free, depending on age) in estate valuations for Inheritance Tax from 6 April 2027.
Inheritance Tax is currently payable if your estate is worth more than £325,000 and you do not leave it to your spouse, civil partner or a charity.
This could affect certain lump sum benefits that may be provided when you die. It could also impact any other pension benefits you have, as all pension benefits are included.
4. Changes to Trust Taxation
Currently, excluded property trusts (EPTs) allow non-UK domiciled individuals to shield non-UK assets from IHT by putting them into a trust before they become domiciled in the UK. Under the new rules:
- Status of a trust depends on whether the settlor was an LTR when the charge is paid, rather than when the trust is created
- If the settlor is an LTR at the time of a chargeable event (such as their death or a trust anniversary charge), non-UK assets will no longer be classified as excluded property and will be subject to IHT.
Implications:
- Existing EPTs will no longer provide a complete shelter from IHT for long-term UK residents.
- Trusts that were previously safe from IHT may now become taxable, necessitating a review of trust structures.
- Non-UK domiciled individuals considering moving to the UK should establish trusts well in advance to mitigate potential tax exposure.
5. Adjustments to Agricultural & Business Property Relief
The government will make the follow adjustments:
- Agricultural Property Relief (APR): The scope of APR will expand to include land managed under environmental agreements with UK governmental bodies.
- Business Property Relief (BPR): From 6 April 2026, BPR will be subject to a cap, with business assets exceeding £1 million incurring a 20% IHT rate.
Implications:
- Family businesses will need to reassess their succession planning, as the new limits on BPR could lead to higher tax burdens.
- Landowners engaged in environmental schemes may benefit from extended APR but must comply with the specific requirements to qualify.
What should affected individuals do ?
1. Review Your Estate Plan
Given the substantial expansion of IHT liability, individuals who may be classified as LTRs must review their estate planning strategies. This includes assessing:
- The potential exposure of non-UK assets to IHT.
- The use of trusts and whether restructuring is necessary.
- Succession planning for businesses and agricultural holdings.
2. Plan for Emigration from the UK
Individuals planning to leave the UK should be aware of the 10-year tail rule and take steps to mitigate its impact:
- Consider gifting assets before reaching LTR status to reduce future IHT liabilities.
- Review trust structures to ensure non-UK assets remain outside the IHT net.
- Leave the UK before the new rules become effective.
3. Seek Professional Advice
These changes significantly alter the tax landscape for UK residents and non-domiciled individuals. Given the complexity, it is essential to consult a tax professional or estate planning expert to develop strategies that minimize exposure to IHT.
