Labour’s New Autumn Budget: Key Changes to Inheritance Tax and Capital Gains Tax, and the impact on tax and estate planning

In perhaps one of the most hotly anticipated budgets since Denis Healey promised to “make the pips squeak” in 1974, Labour’s Autumn Budget has, as expected, brought significant changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT) that will impact on estate and will planning. In short, these reforms announced today will have a substantial impact on how you plan for the future.

Below, we explore the key changes that have been announced and how they could affect you.

1. Inheritance Tax

Thresholds

The IHT threshold, which has been set at £325,000 per individual for 15 years since 2009, was scheduled to be frozen under the previous government to 2028.  Rachel Reeves has extended this to 2030, further eroding the value of the threshold against inflationary increases in asset values.

There was much hope pre-Budget that the Residence Nil rate Band, which is widely recognised as over complex, might be abolished, and the individual IHT allowance increased to £500,000 to compensate, but this has not happened.

Agricultural Property Relief (APR) and Business Property Relief (BPR)

Changes to these reliefs had been widely anticipated and represent the biggest changes to these reliefs since the early 1990s when John Major promised to “cascade wealth down the generations” when at that time the reliefs were increased from 50% to the current benign 100% regime.  Rachel Reeves’ proposals rein back part, but not all, of the reforms of 30 years ago.

First, APR and BPR will remain at 100% but only on the first £1Million of agricultural and business assets (so that a business combining both will have a single £1M threshold).  On the balance over £1Million the relief will be 50%, in other words on that part of the assets IHT will be charged at one half of the standard rate, that is 20%.  It is believed, but this will need to be confirmed, that the ability to pay IHT on agricultural and business assets by interest free instalments will be retained.

Second, the rate of relief on “AIM” shareholdings, currently 100%, will be reduced to 50%.  The new provisions apply to all quoted shares not listed on a recognised stock exchange (e.g. AIM) but ensure that unquoted shares in private companies will still benefit from 100% relief up to the new £1Million ceiling.

These changes will take effect from 6^th April 2026 so there will be planning opportunities in the meantime, and thought will need to be given to reviewing the wills of couples owning agricultural or business property over £1Million in value. For example, to use trust structures to “bank” relief on the death of the first spouse, rather than all the assets passing to the surviving spouse who would only have one “ceiling” available.  It is not known whether the “ceiling” will be transferrable between spouses as that would avoid the need for this sort of complex planning.

Pensions

From 6^th April 2027 unused pension funds and death benefits payable from a pension will be treated as forming part of the deceased pensioner’s estate for IHT purposes.  This reform has been generally expected and the two-and-a-half-year lead in before implementation will give opportunities for planning.

Green and Ethical Inheritance Incentives

In line with Labour’s broader focus on environmental sustainability, it was announced that IHT APR will be extended to land managed under an environmental agreement with the UK Government or devolved Governments, etc.

2. Capital Gains Tax

Rates of tax

This is the tax where the widest reform was expected (and feared).  As broadly forecast by the Government pre-Budget, the rates of CGT payable on residential properties will not change, remaining at 18% for lower rate taxpayers and 24% for higher rate taxpayers. The rates of CGT for non-residential assets will increase, effective immediately, from 10% to 18% for lower rate taxpayers and from 20% to 24% for higher rate taxpayers.  This means private landlords will see no change in the CGT regime but those owning share portfolios will see the CGT they pay on gains realised in their portfolios increase.  Over the past two years the CGT annual allowance has been reduced from £12,300 to only £3,000 so the CGT burden on private share portfolios (and other non-residential property assets) will increase significantly as a result of the combined effect of these changes.

Business Asset Disposal Relief (BADR)

This relief acts to reduce the rate of CGT for business owners disposing of part or all of their business interest.  Currently the rate is reduced to 10% subject to a cap of £1M.   There is no proposal to reduce the cap but the reduced rate on the first £1Million will be increased to 14% from April 2025 and to 18% from April 2026.  Given that the rate of CGT for higher rate taxpayers is being increased to 24% the marginal relief will be effectively 6% - currently it is 10%.

What These Changes Mean for Your Estate Planning

The changes announced in the Autumn budget mark a significant shift in the landscape of IHT, CGT and estate planning. In truth, many more wide-ranging changes had been discussed including increasing the seven year survivorship test for gifts to ten years or the introduction of a gift tax or a wealth tax, none of which have happened, so it is not all bad news!

However, there are some key actions to consider:

• Review or update your will. This is of particular importance for those with business or agricultural assets. It’s crucial to ensure your will reflects the new regime and is structured to minimise tax liabilities.
• Review gifting strategies: the change to CGT rates may impact on some planning concerning the transfer of assets in your lifetime, but the extended lead in for changes to the treatment of pensions and the changes to IHT and BPR give a significant window of opportunity to reorganise your affairs in a tax efficient way for example, the impact of pensions forming part of the IHT estate may encourage individuals to give away more assets in their lifetimes to reduce their potential IHT bill.
• Those thinking of selling their business should take note of the reduced effect of BADR over the next two years.

At Clifton Ingram, we understand the complexity of these changes and are here to guide you through updating your estate plan. Our team of experienced solicitors is ready to help you navigate these new rules and ensure your family’s future is protected.

Speak to one of our legal Inheritance Tax solicitors today by calling 0118 978 0099 or using our contact form and we will respond quickly.

Alternatively talk to someone now via our live web chat.

Peter McGeown is Joint Head of our Wills and Inheritance team and has nearly 40 years’ experience advising on tax, wills and estate planning.  As an Officer at the Inheritance tax Office of HMRC before qualifying as a solicitor, he has a unique perspective on estate planning for our clients.