The 2025 Budget has now been announced. Despite speculation around the abolition of the Residence Nil Rate Band and reforms to lifetime gifting, there have been relatively few changes to inheritance tax. However, there are several important points for will writers and estate planners to be aware of.
Inheritance Tax Thresholds
The Nil Rate Band and Residence Nil Rate Band were previously frozen at their current levels until April 2030, as set out in the 2024 Budget. The government has now confirmed that both thresholds will remain unchanged for a further year, until April 2031.
Similarly, the new £1 million allowance for 100% agricultural property relief (APR) and business property relief (BPR) will also be maintained at its current level until April 2031.
Agricultural and Business Property Relief
The 2024 Budget introduced significant changes to APR and BPR, limiting 100% relief to the first £1 million of qualifying business and agricultural property from April 2026. This allowance was initially not to be transferable between spouses and civil partners.
The latest announcement brings a welcome change: the new £1 million allowance will now be transferable between spouses and civil partners, including where the first death occurred before 6 April 2026. This addresses concerns that the original proposal would have required a return to pre-2007 style trust planning to maximise reliefs.
Pension Funds and Death Benefits
As previously announced, from 6 April 2027, most unused pension funds and death benefits will fall within the scope of inheritance tax. Personal representatives will be responsible for reporting and paying any inheritance tax due on these funds.
The government has confirmed that personal representatives will be able to direct pension scheme administrators to withhold up to 50% of taxable benefits for up to 15 months, to cover inheritance tax liabilities in certain circumstances. Personal representatives will also be discharged from liability for inheritance tax on pensions discovered after HMRC clearance has been received.
Infected Blood Compensation Payments
Legislation will be updated so that payments made under the Infected Blood Compensation Scheme and the Infected Blood Interim Compensation Payment Scheme are exempt from inheritance tax where the original beneficiary died before compensation was paid.
First living recipients of compensation payments will also have a two-year window in which to gift some or all of the compensation without triggering an inheritance tax charge. This applies to compensation payments made before or after 26 November 2025, and to gifts made on or after 4 December 2025.
Other Measures
The government will legislate to close certain inheritance tax avoidance loopholes. In addition, a cap of £5 million will be introduced on relevant property trust charges for excluded property trusts established before 30 October 2024.
Conclusion
In summary, while the 2025 Budget does not overhaul the inheritance tax landscape, it introduces a number of nuanced changes that will affect will drafting and estate administration. It is important for will writers to be aware of the extended freezes on thresholds, the transferability of the new APR and BPR allowances, and the evolving treatment of pension funds.
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