Inheritance Tax Shake-Up: What the October Budget Means for You

It is safe to say the October budget caused a bit of a stir. The impact of National Insurance on employers and Inheritance Tax (IHT) on farmers grabbed many of the headlines, however, many more individuals will be impacted.

As of 2027, pensions will now form part of an individual’s estate for inheritance tax purposes whereas currently they are exempt. This will inevitably lead to individuals who never dreamed that they would be subject to IHT now finding themselves in that bracket. Analysis by DJ Alexander put the average house price in Scotland at £195,036 as of November 2024. The Pensions and Lifetime Savings Association estimates that a pension pot of £301,000 would be required for a “moderate” lifestyle in retirement. That would mean that these two things alone would account for almost all an individual’s inheritance tax nil rate band (£325,000) plus their residence nil rate band (up to £175,000 if available) as they approach retirement.

In many cases, the inheritance tax liability will resolve itself naturally through decumulation in retirement, however, if this is not the case then there are many options you should discuss with your adviser such as whole of life cover, using your gifting allowances or making larger gifts into trust.

Another option to consider is business relief. These are not for everyone as they are high risk but in the right set of circumstances are worth considering as:

• They have the potential to obtain 100% IHT relief after two years.
• Unlike other forms of IHT planning the investment stays in your name and you retain access.
• They can add diversification to your planning as they do not necessarily correlate with mainstream markets.
• Most Business Relief products target steady returns. However, these services are high risk and non-investors are not guaranteed to receive the returns previously achieved.

Former Labour Chancellor Roy Jenkins famously described Inheritance Tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.” That said, it is not straightforward and it is not a case of one solution fits all so if you do like your heirs getting advice is key!

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Gilson Gray Financial Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances. Tax advice is not regulated by the Financial Conduct Authority.