The UK Autumn Budget of 30 October is a fortnight ago, but the controversy around it hasn’t faded. One angle concerns a squeeze on reliefs under inheritance tax. This article examines the changes and other hikes that affect HNW individuals.

The following article, from Ingrid McCleave (pictured), partner at law firm DMH Stallard, addresses the recent changes to inheritance tax (IHT) in the UK introduced by Rachel Reeves, Chancellor of the Exchequer, aka finance minister. (See this news service's editorial on the Budget.) The changes to the IHT rules, for example, how they affect family-owned farms, and the pension plans of a deceased person, have already prompted considerable political controversy. 

The changes are already causing private client advisors to spend considerable time guiding clients about what to do next. This article gives a sense of the terrain. The editors welcome this contribution and invite readers to respond. The usual editorial disclaimers apply to views of external contributors. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

There have been five Chancellors in the five years since 2019. In her first budget, the latest Chancellor Rachel Reeves made plenty of headlines. Following last month’s budget, the UK taxes are set to rise by £44 billon ($56 billion). Creating the highest tax burden since 1948, taxes are forecast to reach 36.5 per cent of national income in 2024–25 and 37.1 per cent by 2028–29. 

A total of 70 different tax measures were announced. Most prominent among them was the significant increase in Employers’ National Insurance contributions (NICs) which will rise by 1.2 per cent to 15 per cent from next April, raising approximately £25 billion over the next five years. 

Simultaneously, the threshold at which NI applies will fall. From April 2025, employers will pay NICs on an employee's earnings above £5,000 at 15 per cent. However, the employment allowance will be increased to £10,500 per year to help smaller businesses. Taken together these NI changes will still have an impact on many SMEs (small and medium-sized enterprises) which are critical for future growth in our economy. Equally, for the entrepreneurs who often take financial risks and put their personal assets on the line to keep SMEs afloat, there was more bad news. 

Reeves confirmed that the amount of money raised from inheritance tax would rise. An example of fiscal drag (when tax thresholds remain the same, causing more people to pay tax over time because of inflation), the budget extended the thresholds freeze – £325,000 for the nil-rate band and £175,000 for the residence nil-rate band – by two years from 2028 until 2030. Ultimately, this will push many thousands more estates above the IHT thresholds. Farmers were also targeted as the Chancellor imposed a 20 per cent IHT on their assets valued at more than £1 million. Rebel farmers are threatening to blockade ports in protest, reports say.

In a dramatic departure from the current rules where pension money is usually ring-fenced so that it can be passed on free of IHT, the Budget announced that from April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes.

Despite stories predicting that it would be abolished, business asset disposal relief (BADR, formerly entrepreneurs’ relief) remains, albeit with the CGT rate rising from 10 per cent to 14 per cent next April and to 18 per cent for disposals made after April 2026. Investors’ Relief (IR), a tax break for AIM market investors and business angels, is set to increase in line with BADR. 

From 30 October 2024, the lifetime allowance for IR will be reduced from £10 million to £1 million for disposals, thereby aligning IR with BADR. There had been rumours that BADR would be abolished, so preserving the £1 million lifetime limit is a better outcome than some anticipated. 

Nevertheless, entrepreneurs will still be squeezed at both ends: their employment costs are being increased and they will have to pay more tax under the BADR changes when they want to sell their businesses. 

An alignment of capital gains tax (CGT) rates with income tax rates was also widely anticipated, but it did not materialise. More modest rate increases were chosen instead: the lower rate has increased from 10 per cent to 18 per cent, while the higher rate has risen from 20 per cent to 24 per cent, aligning with the CGT rate on investment properties owned by individuals.   

Landlords were already under pressure because of the reduced interest deductions on mortgages. Following the budget, investment properties also face higher taxes on the buy side: for second homes, buy-to-let, and company purchases the Stamp Duty Land Tax (SDLT) surcharge has also risen – from 3 per cent to 5 per cent. 

This could be a tipping point for landlords. The impact for new acquisitions will be immediate, pushing many of them to leave the rental business altogether. The rental market will therefore face a further squeeze: the number of properties available for rent will fall creating a further spike in rental costs.

Changing course will not be an option for most entrepreneurs. Instead, they will have to live with the consequences of the budget and plan accordingly.  

About the author

Ingrid McCleave is a solicitor and a barrister. She works with high net worth individuals on strategies to save inheritance tax and encourages clients to put strategies in place to reduce their liability. She advises clients on capital gains mitigation, stamp duty, land tax mitigation and the incorporation of businesses including large property portfolios owned in sole or joint names.