Crackdown on Inheritance Tax: Taxation of Pensions and Aim Shares announced in Autumn Budget 2024
The UK government has announced significant changes to the Inheritance Tax (IHT) system, with the most notable impact being the inclusion of unused pension funds and death benefits in the estate value from April 6, 2027. This change will affect a large number of estates and increase tax bills for those with substantial pension wealth.
From April 2027, pension pots will no longer be exempt from IHT, meaning bereaved families may face a tax bill of up to 40% on inherited retirement savings. The tax payment responsibility will rest with pension scheme trustees, creating administrative challenges for pension schemes. As a result, it is estimated that around 8% of estates will be affected each year, increasing the number of estates liable for IHT by about 13%.
AIM shares, which previously qualified for 100% IHT relief as "unquoted shares," will only receive 50% relief from April 2026. This reduction in relief will increase the effective tax burden on these investments, making them less attractive for IHT planning.
In addition to these changes, the standard nil-rate band remains at £325,000, with an additional main residence nil-rate band of £175,000. This combined allowance offers a potential total of £500,000 where the home passes to direct descendants. However, this allowance is not indexed to inflation, effectively freezing the thresholds and increasing the number of estates subject to IHT over time.
The changes announced today were not as drastic as initially feared, but the freeze on the nil-rate band can have far-reaching implications. Experts warn that the freeze will make the threshold even more antiquated and compound record-breaking IHT receipts.
The changes are forecast to raise £640 million in 2027-28, rising to £1.3 billion in 2028-29 and £1.5 billion in 2029-30. Inheritance tax will apply at a reduced rate (20%) on business and agricultural assets over £1 million from April 2026.
These changes mean that pension wealth will increasingly come under the IHT net, the attractiveness of AIM shares for IHT planning will diminish, and the existing nil-rate band freeze combined with residence band limits will continue to push more estates into IHT liability.
These reforms have been met with criticism from various sectors, with experts warning that the reduction in exemptions for farmland and AIM shares could have a negative impact on the junior market. Personal finance and pensions experts have also expressed concern over the move to scrap the IHT exemption on unspent pension savings, which they believe will be a blow to savers who have worked hard to beef up their retirement pots to harness estate-planning perks.
In conclusion, the UK government's changes to the IHT system will have a significant impact on many estates, particularly those with substantial pension wealth and investments in AIM shares. The freeze on the nil-rate band and the reduction in exemptions for farmland and AIM shares will push more estates, even relatively modest ones, into the IHT net, potentially compounding record-breaking IHT receipts in the coming years.
- With pension pots no longer being exempt from Inheritance Tax (IHT) from April 2027, personal finance experts are concerned about the potential tax bills on inherited retirement savings, which could reach up to 40%.
- The change in the IHT system will impact not only large estates but also those with investments in AIM shares, as the reduction in relief for these investments will increase the effective tax burden.
- The UK government's reforms, including the freeze on the nil-rate band and the reduction in exemptions for farmland and AIM shares, will lead to more estates, even those of modest value, falling under the IHT net, potentially causing record-breaking IHT receipts in the upcoming years.
