UK Budget 2024: Major Inheritance Tax Reforms and Estate Planning – Why Action Is Needed

Shift from Domicile to Residence-Based Taxation

(Effective April 2025)

The most fundamental change is the move from a domicile-based to a residence-based IHT system. From April 2025, IHT liability will be determined by UK tax residency rather than domicile status.
Individuals who have been UK tax residents for 10 or more of the past 20 tax years—referred to as Long-Term Residents (LTRs)—will be subject to IHT on their worldwide assets, regardless of their domicile.
This reform dramatically increases IHT exposure for long-term UK residents and non-domiciled individuals who previously relied on their domicile status to shield foreign assets.

Trusts and Non-Doms:

Previously, Excluded Property Trusts allowed non-doms to protect non-UK assets from IHT. From April 2025, the IHT status of a trust will depend on whether the settlor is an LTR at the time of a chargeable event. If so, non-UK assets within the trust will be subject to IHT—even if the trust was established before the settlor became UK domiciled. This change necessitates an urgent review of existing trust structures for non-doms likely to become LTRs.

Business and Agricultural Relief Reforms

(Effective April 2026)

From April 2026, Business Relief (BR) and Agricultural Property Relief (APR) will be capped:

• Full relief will apply only to the first £1 million of qualifying assets.
• For amounts above this cap, only 50% relief will be available—effectively resulting in a 20% IHT charge.

While media coverage has mainly focused on the impact on farmers, this change will also affect all qualifying businesses valued over £1 million.

Key Planning Considerations:

• Unlike the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB), the £1 million BR/APR cap is not transferable between spouses.
• Succession plans and shareholder structures should be reviewed for businesses exceeding the £1 million threshold.
• Funding potential IHT liabilities, especially from within the business, requires careful planning to avoid triggering other tax consequences.

Pensions and Death Benefits

(Effective April 2027)

From 6 April 2027, unused pension funds and certain death benefits will be included in an individual’s taxable estate. This change could bring many more estates into the IHT net.
In addition to IHT, inherited pensions may also be subject to income tax—potentially resulting in a combined tax rate of up to 67%, depending on the beneficiary’s marginal income tax rate. If the value of the estate exceeds £2 million, the RNRB taper may apply, further increasing the tax burden.

The Bigger Picture

In 2020–21, IHT receipts stood at £5.3 billion. The Office for Budget Responsibility (OBR) forecasts this will rise to £9.1 billion this year and £14.3 billion by the end of the decade. The combination of these reforms and the continued freezing of the NRB and RNRB will have a profound impact.