Inheritance Tax (IHT) is set to undergo significant changes in the coming years, which could impact many families across the UK. Probate specialist Josh White from Level Group has outlined four key updates to IHT that are expected to take effect between 2025 and 2030. These changes could double the number of families paying IHT, with one in 10 UK families potentially facing the tax by 2030. Here’s a breakdown of the upcoming changes:
1. **Residency-Based Tax (April 2025)**:
The current “non-domiciled” (non-dom) status, which exempts individuals from paying IHT on foreign assets, will be replaced by a residency-based system. A new “Long-Term Resident” (LTR) rule will be introduced, meaning anyone who has been a UK resident for 10 of the last 20 years will be subject to IHT on their worldwide assets. Non-LTRs will only be taxed on UK assets. Even LTRs who leave the UK will still be taxed on worldwide assets for up to 10 years. This change is expected to affect around 9,300 individuals annually.
2. **Inclusion of Farms and Businesses (April 2026)**:
Agricultural and business assets will no longer be fully exempt from IHT. Families can still pass on up to £1 million in these assets tax-free, but anything above that will be taxed at 20%, half the standard IHT rate of 40%. This change has sparked concern among farmers, with estimates suggesting between 500 and 70,000 farms could be affected annually.
3. **Pensions Under IHT (April 2027)**:
Defined contribution pension plans will be included in estate valuations for IHT purposes. This means that pensions, which were previously excluded, could now be subject to the 40% IHT rate. This change is expected to impact nearly 40,000 estates, increasing their IHT liabilities.
4. **End of IHT Threshold Freeze (2030)**:
The current freeze on the IHT threshold, which has been in place for several years, is set to end in 2030. This could lead to more estates being pulled into the IHT net as asset values rise over time.
Josh White emphasized the importance of planning ahead to minimize the impact of these changes. For example, offshore trusts, which were previously excluded from IHT, will now be subject to the tax if the settlor qualifies as an LTR. Families with agricultural or business assets should also prepare for the new rules, as the inclusion of pensions in estate valuations could significantly increase IHT bills for many.
These changes highlight the need for families to review their estate planning strategies to ensure they are prepared for the new IHT landscape. For more information, individuals can visit the Gov.uk website or consult with financial advisors to navigate these complex changes effectively.
