Budget 2025: Government To Press On With Inheritance Tax and Pension Reforms
Over the summer, HMRC confirmed through draft legislation that, from 6 April 2027, unused pension funds will be included in an individual’s estate for inheritance tax (IHT) purposes. Alongside this, important reforms to Business Relief (BR) have also been confirmed to take effect from 6 April 2026.
What is happening to pensions?
Historically, pensions have offered more than just a means to fund retirement, they have provided a tax-efficient way to pass wealth on to loved ones. Therefore, the key changes that were initially announced back in the Autumn 2024 Budget represent a significant shift in how those in later life should approach their estate planning moving forward.
Since the announcement, there has been widespread speculation in the financial press about whether these changes might be reversed following strong opposition. This uncertainty can potentially lead to inaction as those in retirement sit on their hands and wait. With the government now reaffirming its intentions through the draft legislation, those who waited for further clarity have lost nearly a year of valuable planning to consider alternative tax-efficient strategies to help mitigate IHT.
At Harold Stephens, we have emphasised the importance of early planning for some time to help deliver good estate planning outcomes for our clients. Since the changes in the Autumn Budget, we have been actively supporting clients in navigating the incoming rules to help prepare well before the legislation becomes official. Now, with the government moving forward, if you are post-retirement or are in later life, you should avoid further delay and contact us to discuss your estate planning options.
What does the published draft legislation reaffirm for pensions?
The summer’s proposals remain largely unchanged from those initially announced in the Autumn Budget. The draft legislation confirms that almost all unspent pension funds will be included in the deceased’s taxable estate for IHT purposes. Despite these significant changes, the government has reconfirmed some important exemptions, including those for spouses, as well as death in service benefits from registered pension schemes.
And what about Business Relief?
Business Relief changes are also moving forward, with the new rules taking effect from 6 April 2026. The draft legislation introduces an allowance for unquoted business assets up to £1 million which attracts 100% IHT relief. Any value above this will attract 50% relief. Therefore for those of you in later life who are looking to plan for IHT, can rest assured that you still have a £1m allowance to invest in our hugely popular and independently recommended IHT planning investment portfolios.
AIM-listed shares will not qualify for the £1 million allowance but will still attract 50% IHT relief. While some had hoped for an increase in the AIM IHT relief in the updated draft legislation, it’s important to recognise that these remain valuable reliefs. Moreover, the summer’s Mansion House speech acknowledges the government’s renewed commitment to channelling more long-term capital into UK high-growth businesses, including those listed on AIM. Therefore there is still significant upside investment potential by investing in IHT AIM ISAs as well as the 50% IHT relief.
Has anything new been raised in the draft legislation?
The draft legislation includes some important revisions and new measures that aim to address practical concerns raised since the Autumn Budget:
Business Relief (IHT Free Investment Plans):
The £1 million IHT free allowance will be frozen until April 2030, aligning with the wider freeze on IHT allowances. After this it will increase in line with inflation meaning the value of this £1m allowance will increase in time increasing the amount that attracts 100% IHT relief.
The draft legislation confirms that Business Relief assets held in pensions will not attract BR relief, affirming that IHT Free Investment Plans must be held outside the pension wrapper for the IHT free status to apply.
Pensions:
The government has announced that beneficiaries who pay IHT on pension funds may claim a deduction against their income tax liability on any subsequent pension drawdown. This could help soften the blow on the high overall effective rate of tax now on pension pots, of over 80%. However, this relief is only available if the beneficiary pays the IHT.
There has been clarification that the executors are responsible for paying IHT on pension funds to HMRC, overturning earlier suggestions that pension providers would bear this responsibility.
Finally, it has been confirmed that it does not matter if the pension is currently in drawdown, any unused amount on death should still be subject to IHT.
It’s imperative to act earlier when it comes to Estate Planning
Now that the draft legislation has clarified key details and confirmed the government’s intention to proceed, those in later life should revisit estate plans with greater confidence. In particular, it could be time to reconsider the traditional order of estate planning, especially as the traditional advice to “touch pensions last” may no longer apply. This could be especially true for those in retirement or later life when you are accessing their built-up wealth.
In this context, many in later life are increasingly turning to tax-efficient solutions such as our Business Relief qualifying IHT Free investment plans. These investments can offer both planning flexibility and fast IHT relief for those focused on preserving intergenerational wealth. The government’s commitment to Business Relief is a recognition of how important a tool it is in estate planning. Many in later life who have IHT issues should consider how using the new £1m allowance can be used in conjunction with other estate planning strategies.
Call 0117 3636212 or email office@haroldstephens.co.uk to arrange your initial complimentary meeting with a later life specialist financial adviser
Still not convinced?
Following on from Labour’s second budget which takes place on Wednesday 26th November, independent financial adviser, Richard Higgs will take you through the budget’s impact on your financial planning.
Find out more about the changes from both this budget as well as the upcoming changes from the autumn budget in 2024 including potential new planning to consider.
Wednesday 3rd December - 1.30pm - 2.30pm - St Peter’s Church, The Drive, Henleaze BS9 4LD
Wednesday 3rd December - 6pm - 7pm - Stoke Lodge, Shirehampton Road, Stoke Bishop BS9 1BN
Book your place by calling 0117 3636 212 or emailing community@haroldstephens.co.uk.