How could the 2025 Budget affect your inheritance planning?

What are the ‘known knowns’ about inheritance tax changes?

The October 2024 Budget announced several measures which are not due to come into place until 2026 or even 2027. We now have draft legislation for much of this, although it is still being worked through Parliament.

Inheritance tax (IHT), agricultural property relief (APR) and business property relief (BPR) reforms, which dominated the headlines last year, are due to apply from 2026. So, from 6 April next year, family agricultural property or business property will be subject to IHT at 50% of its value above £1 million.

For alternative investment market (AIM) shares, IHT is applied to 50% of the value, with no upper threshold.

With inheritance tax (IHT) currently applied at 40% above £325,000, careful consideration is important to ensure you’re balancing your family’s needs alongside your tax requirements.

A lot of our clients have been working with their accountants and lawyers to ensure they make the most of the reliefs that will be available. There are anti-forestalling measures in place though, so you do need expert advice if you don’t want to be affected by these.

Pension changes

In 2027, there is another big change due – IHT on an inherited defined contribution pension. Again, there has been a consultation about how these rules should work, and it now seems the executors of the estate will primarily be liable for reporting and paying to HMRC any IHT due.

This IHT change has meant a lot of our clients are having to think differently about the purpose and use of their pension pots. There is also the potential for income tax on the pension withdrawal so clients may want to consider their options here if a major pension drawdown is part of their future plans. With the help of your accountants and financial advisers you can discuss the timings, size of a potential lumps sum withdrawal and what best to do with it.

However it is still important to remember that pensions remain an incredibly powerful tool for saving for retirement.

What are some of the rumours which might affect inheritance and generational planning?

Gifting money or assets to family members is an established way of passing on wealth before death. Currently, a gift made to an individual is classed as a potentially exempt transfer (PET) and is not subject to IHT if it is made seven years or more before the donor dies.

There are rumours that this time frame could rise, or that a threshold could be brought in to restrict the amount gifted before tax applies. However, we do not know whether these measures are even being properly considered by the government.

There are numerous other suggestions including changes to pension lump sums, a restriction on the tax relief currently applied to pension contributions, wealth taxes and/or a restriction of ISA amounts and national insurance on rental income. Again, at this stage, this is all speculation.

Our view

Most importantly, the key message is to think sensibly about your finances and not be panicked by the possibility of tax changes. Planning for your wealth will often go hand-in-hand with planning your family’s future – so often the best guidance is not to do anything rash.

Today, families may be worried about taxes on finances or assets, but selling an asset quickly may mean you do not receive the full value you had hoped to achieve when you bought it. And, realising a sale may mean you fall within another tax threshold elsewhere.

What most of our clients fear are changes that come into effect at midnight on Budget day. For all the most significant reforms, people will be well informed and know what is coming as there will be a long consultation process before these policies are implemented.

They’re not designed to catch people off guard – although sometimes there are anti-forestalling rules to stop people taking advantage of gaps in the law that Parliament did not intend.

For example, the concept of a general wealth tax has been ruled out by ministers and it’s very, very difficult to apply a value tax overnight. So, remember that very few things in the Budget are sudden in effect, there is debate in Parliament until the law is passed, which can take many months.

For a number of our clients, the possibility of change is helping them think about what they want to do with their wealth and encouraging them to put plans in place.

For example, if you are considering gifting a sum to a child to help with a house deposit, you may want to do it sooner rather than later. But be aware it’s often best to plan around your goals rather than tax per se. You still need to ensure the person receiving the money is ready for the wealth and understands its implications and the mutual wealth goals you may have as a family.

How Coutts could support your family’s wealth transitions

Wealth planning almost inevitably revolves around generational transition. For families this means careful planning to ensure wealth moves to family members in a timely and structured way – making sure they are ready to manage new wealth while also being aware of the tax implications that may apply at such a juncture.

We aim to unify a service that is cognisant of how clients and their families evolve – next generation and wealth transition is so often at the heart of this.

As your wealth manager, we want to be in the best place to guide you and your children through this process, notably through the Coutts Institute and our ‘Collab’ programme which invites children of clients, those moving over the threshold of adulthood and typically aged between 21-35, to join us for a day of workshops.

Together, we take those attending through everything from financial planning and investing, to entrepreneurship and networking, to managing reputational risk through social media. We also invite external specialists and existing clients in as guest speakers to share their journeys and experiences.

We aim to give a grounded approach to any situation our audience may encounter, including understanding tax, inheritance and gifting.

Here to support you and your family

Our private banking teams are on hand to provide you with a personal, family-orientated service, working to understand and realise the ambitions unique to each family. That might involve passing on the family business, starting a new venture, exchanging home ownership, creating trusts or managing a significant inheritance held in a range of assets and jurisdictions.

The passing over of wealth, however it is rendered, must be done with care and diligence. Our expertise also extends to a carefully curated list of recommended external advisers who can also help you with your tax and legal requirements.

As holistic wealth managers we understand the concerns fiscal policy changes can raise. Please speak to you Private Banker if you have any queries or would simply like to know more about how the above themes could affect you.   

Criteria, terms & conditions and fees may apply for our services.

Tax reliefs referred to may change. The availability and value of any tax reliefs will depend on your individual circumstances.