The chancellor has announced an inheritance tax crackdown that will see pension pots and Aim shares subject to the tax.
Rachel Reeves said in her Budget speech that only 6% of estates will pay inheritance tax (IHT) this year, and that she wanted to take a “balanced approach” to changing the tax in a bid to raise revenue.
Experts had been worried that the nil-rate band (the tax-free allowance for inheritance tax) could be cut, or the 40% rate increased.
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The chancellor decided against this, instead extending the freeze on the £325,000 nil-rate band to 2030.
She also announced reforms to business and agricultural property relief - affecting Aim shares - and said pension pots would form part of the estate for IHT purposes, meaning bereaved families face paying up to 40% on inherited retirement savings.
Craig Rickman, personal finance and pensions expert at Interactive Investor, comments: “Reeves’ move to scrap the IHT exemption on unspent pension savings is bold, and will be a blow to savers who have beefed up their retirement pots to harness the estate-planning perks.
“Presumably this means that your pension pot will form part of your estate on death and unless your heir is a spouse or civil partner, they will pay 40% tax on anything that exceeds your tax-free allowances. This will reduce the allure of cascading pension pots down generations."
Inheritance tax on pensions
The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027.
The Budget document said: “This will restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pensions reforms.”
According to the Treasury, “bringing unspent pots into the scope of inheritance tax from April 2027 will affect around 8% of estates each year".
The measure is forecast to raise £640 million in 2027-28, rising to £1.3 billion in 2028-29 and £1.5 billion in 2029-30.
Tom Stevenson, investment director at Fidelity International, says the announcement was “largely expected” as the inheritance tax exemption for pension pots “is something of an anomaly”. He adds: “This will prompt some rethinking of retirees’ decumulation strategies because it is no longer quite so obvious that they should draw down their ISA savings before tapping into their pensions. It could make annuities relatively more attractive for some.”
Inheritance tax on Aim shares
Reeves also cut business property relief and agricultural property relief. From April 2026, inheritance tax will apply at a reduced rate after the first £1 million of business and agricultural assets.
This will be levied at 50%, giving an IHT rate of 20% (half of the 40% rate).
Aim shares will also no longer be exempt from IHT. The government is reducing the rate of business property relief to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as Aim. This also means an IHT rate of 20%, and again, it will kick in from April 2026.
According to official forecasts, the move will affect around 0.3% of estates each year.
Stevenson comments: “The exemptions for farmland and Aim shares have been significantly reduced which is bad news for the junior market, which has already underperformed badly this year. There will be relief, however, that speculation around the rules on gift giving seem to have come to nothing.”
Richard Stone, chief executive of the Association of Investment Companies (AIC), adds: “Bringing all Aim shares and pension funds into the scope of inheritance tax will act as a disincentive to build and retain those long-term investments for the benefit of future generations.”
Extending the nil-rate band freeze
Reeves said that the £325,000 nil-rate band will remain at this level until April 2030. The residence nil-rate band of £175,000 (giving a total of £500,000 when used together) will also be frozen until this date.
While experts concur that the inheritance tax changes announced today were not as bad as feared, the effect of freezing a threshold can have far-reaching implications.
Rachael Griffin, tax and financial planning expert at Quilter, comments: "The decision to continue the freeze on the IHT nil rate band (NRB) at £325,000 will pull many more estates, which many would consider relatively modest, into the inheritance tax net.
"The NRB has been frozen since 2009 and if it had risen in line with inflation, it should now be £503,879 so freezing this until 2030 will make this threshold even more antiquated. We are already seeing record-breaking IHT receipts, and this change will compound this."
