Inheritance tax: will you pay more after the Autumn Budget?

Chancellor Rachel Reeves and Prime Minister Keir Starmer warned that the Autumn Budget would be "painful" and the fiscal statement ended up including controversial reforms to wealth taxes such as inheritance tax (IHT).

The chancellor introduced restrictions on agricultural property relief from April 2026. Pensions will also form part of an estate for IHT purposes from April 2027 and Aim shares will also no longer be fully exempt from IHT.

All of this means more estates are likely to fall into the IHT net.

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It comes as HM Revenue and Customs (HMRC) data shows IHT receipts totalled £7.5bn in the 2023/24 tax year – the highest figure ever. This followed on from another record-breaking year in 2022/23.

More estates are already being dragged into paying the controversial tax due to high house prices and frozen thresholds.

How has Labour changed the rules on inheritance tax?

Inheritance tax is a divisive and politicised tax and policy expectations have yo-yoed in recent times. Just a year ago, many were expecting former Conservative chancellor Jeremy Hunt to scrap the tax in his 2023 Autumn Statement. Ultimately, this did not materialise.

The Prime Minister was clear ahead of the Autumn Budget that it would involve “tough decisions”, prompting commentators to warn the public of widescale tax hikes. One of the policies that was announced was an extension of the £325,000 nil-rate threshold until 2030.

One of the most controversial announcements was a change to the way agricultural and business property relief is taxed.

Currently, an estate that contains farmland and assets will receive 100% IHT relief as long as it was actively farmed for more than two years. The relief is 50% for land owned between 10 March 1981 and 1 September 1995.

There is also business property relief for business assets that are part of someone’s estate when they pass away. But as part of plans to plug public finance shortfalls, Reeves announced in her Budget that the relief would be restricted to the first £1 million after 6 April 2026.

This applies to combined agricultural and business property reliefs. Above this amount, landowners will pay inheritance tax at a reduced rate of 20%, rather than the standard 40%.

Additionally, alternative investment market stocks will form part of an estate for inheritance tax purposes from April 2026, and pensions will be included from April 2027. This makes IHT planning more complicated and more important for wealthy individuals.

Gary Smith, financial planning partner at Evelyn Partners, said: "More families will be drawn into the web of inheritance tax from 2027, and some of those will need to start planning now if they want to mitigate the effects."

Focusing on the pension changes, he added: "The IHT rule change [on pensions] will transform the way some savers think about their pensions and funding retirement. Many retirees, and especially those close to and above age 75, will be revising what to do with their pension pots and that will probably lead to more pension savings being drawn down.

"The prospect of pension funds being taxed twice, if beneficiaries also have to pay income tax on withdrawals, is one that most savers will want to avoid. Also, if the addition of pension savings will push the total value of an estate over the £2 million mark, then the residence nil-rate band will start to disappear and IHT bills will become even more onerous."

But Smith said the principles of estate planning remain the same, adding: "It's a balancing act between access to the money you need in order to make sure that you live the life you want and don't run short, versus the IHT savings of reducing the value of your estate."

How much can you pass on without paying inheritance tax?

Under current rules, you can pass on an estate worth up to £325,000 before an inheritance tax bill is due, with an additional £175,000 allowance for those leaving the family home to their children or grandchildren. These allowances are known as the regular and residential nil-rate bands.

The £325,000 allowance has been at this level since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020. House prices have risen considerably in this period, meaning families are now able to pass on less wealth before being hit by a hefty tax bill.

The average UK house price was around £230,000 when the residential nil-rate band was first introduced, according to data from the Office for National Statistics (ONS). Today it is £293,000. Meanwhile in London, the average house now costs £531,000.

The good news is there are some strategies you can take to pass on more of your estate tax-free. For example, married couples and civil partners can combine their tax-free allowances to pass on an estate worth up to £1 million (£325,000 + £175,000 + £325,000 + £175,000).

This rule leaves out single parents or unmarried couples looking to leave a property to their children, though. Furthermore, only direct descendants are able to take advantage of the residential nil-rate band – so siblings, nieces and nephews are excluded.

Does inheritance tax only impact the wealthy?

Only around 4% of estates pay inheritance tax under current rules, but fiscal drag is drawing more families into the inheritance tax net. Furthermore, rising asset prices mean it's not just the ultra-wealthy who are impacted. In fact, they often pay less inheritance tax than those who sit somewhere in the middle.

“The super-rich tend to avoid it by hiring tax advisers to navigate the complex web of reliefs and exemptions,” says Rachael Griffin, tax and financial planning expert at Quilter.

“Consequently, the majority of the annual £7bn revenue comes from those who are well-off, but largely because they have worked hard, saved, and invested diligently throughout their lives,” she adds.

Against this backdrop, it’s unsurprising that IHT is one of the most-hated taxes in Britain – and it could be about to get a whole lot more unpopular once the changes announced in the Budget kick in.