Budget 2024: inheritance tax changes

On 30 October 2024, Chancellor Rachel Reeves delivered her first Budget – a £40 billion package of tax increases. 

One of the areas most affected by the Budget announcements is inheritance tax (IHT). 

The Chancellor announced a series of changes, estimated to raise £2 billion a year. Here we provide a quick recap of current rules, how they are changing and how these changes might affect investors. 

As ever, this is a quick summary of a complex subject for UK-domiciled investors only. You should not make any decisions based solely on this. If in doubt, please seek professional advice. 

1. Freeze of the nil-rate bands

Under current rules, an estate might be liable for IHT if it exceeds a certain value: £325,000 (the nil-rate band) plus £175,000 (residence nil-rate band). 

The nil-rate band is available to individuals and can be set against all asset types. It has been at the current £325,000 level since 2009/10. 

Meanwhile, the residence nil-rate band only applies in certain circumstances – put simply, if you are passing your family home to direct descendants. Moreover, for estates with net values over £2 million, a taper is in place, reducing the amount of the residence nil-rate band until it reaches zero (for estates with a net value of £2,350,000 or more). The residence nil-rate band has been at the current level since 2020/21.

What is changing?

In the Budget, the Chancellor extended the freeze of the two allowances until 2030 (previously frozen until 2028).

Currently, inheritance tax is paid on about 27,800 estates a year. This further extension of the freeze is forecast to increase the number of taxpaying estates by 4,300 and raise an extra £465,000.

2. Unused pensions to be included in the estate

Under current rules, pensions can generally be passed on very tax efficiently. When you die, your pension is not normally considered part of your estate and can therefore be passed on free of inheritance tax. Broadly speaking, tax is only due if you die after age 75, in which case the beneficiary may be liable for income tax when they take money out. 

What is changing?

As announced at the Autumn Budget 2024, from 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate and could therefore be subject to inheritance tax of 40%. 

We don't yet know how this will work in practice – and we probably won't until early 2025. The government is currently consulting on the processes required to implement these changes. Once the consultation ends, expected in January 2025, the government should publish a response document followed by a technical consultation on draft legislation in 2025. 

This measure may discourage investors from accumulating pension wealth to be passed on. It may encourage investors to consider other options to reduce their overall inheritance tax liability, including investments that qualify for Business Property Relief (BPR). 

3. IHT relief on private assets and businesses to be capped

Under current rules, many private businesses qualify for Business Property Relief (BPR). 

BPR was introduced in 1976 to allow family businesses to be passed down through generations tax efficiently. Its scope later widened, so now BPR is available for a range of assets – including certain private companies (e.g. EIS and SEIS companies as well as commercial forests) – in which you can invest.

If a company qualifies for BPR, its shareholders could benefit from 100% IHT relief after two years, provided they still hold the shares on death and the company remains qualifying. 

What is changing?

BPR-qualifying companies and assets will still benefit from IHT relief. 

However, from 6 April 2026, 100% IHT relief on private companies will be limited to the first £1 million of qualifying assets. This allowance covers both private companies and agricultural property. 

Anything above £1 million will still benefit from IHT relief but at a reduced rate of 50%.

4. IHT relief on AIM shares to halve

Under current rules, certain AIM shares also qualify for BPR and are therefore eligible for 100% inheritance tax relief if held for at least two years and on death. 

This also means that if an ISA is invested in AIM shares (e.g. AIM IHT portfolios), on death the ISA can be passed on free of inheritance tax. Conventional Stocks & Shares ISAs are not eligible for any form of IHT relief. 

What is changing?

Prior to the Budget, there were widespread rumours IHT relief on AIM shares might be scrapped. 

The reality has proved better than expectations. 

Qualifying AIM shares will continue to benefit from IHT relief, but from 6 April 2026 at the reduced rate of 50% – an effective IHT rate of 20%. To clarify, AIM shares do not use up the £1 million IHT-free BPR allowance. 

Whilst less favourable than the current rules, this change still allows some AIM shares (including AIM ISA portfolios) to be passed on more tax-efficiently than portfolios of shares listed on the main market (including conventional Stocks & Shares ISAs).