The UK government has announced significant changes to the taxation of inheritances and donations, set to take effect from April 6, 2025. These reforms aim to broaden the scope of Inheritance Tax (IHT) and adjust reliefs associated with certain assets. Key changes include:

1. Shift from Domicile-Based to Residence-Based Taxation

Currently, IHT liability is determined by an individual's domicile status. From April 6, 2025, this will change to a residence-based system. Individuals who have been UK tax residents for 10 consecutive years will be classified as long-term residents (LTRs) and subject to IHT on their worldwide assets. If an LTR leaves the UK, they will retain this worldwide IHT liability for 10 years, an increase from the current three-year period.

withersworldwide.com

2. Inclusion of Pensions in IHT

Starting April 6, 2027, unused pensions and death benefits will be included in the taxable estate for IHT purposes. This change affects the tax efficiency of pensions as wealth transfer tools, prompting many to reconsider their estate planning strategies.

thetimes.co.uk

3. Reforms to Agricultural and Business Property Reliefs

From April 6, 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will be capped at £1 million of combined value in an estate. Assets exceeding this threshold will receive a reduced relief rate of 50%, effectively subjecting them to a 20% IHT rate. This reform aims to increase tax revenues but has raised concerns about its impact on family businesses and farms.

thetimes.co.uk

4. Abolition of the Remittance Basis of Taxation

The remittance basis of taxation, which allowed non-domiciled individuals to be taxed only on UK income and gains, will be abolished from April 6, 2025. A new residence-based system will be introduced, granting 100% relief on foreign income and gains for new UK residents during their first four years, provided they were not UK tax residents in the preceding 10 years.

gov.uk

5. Adjustments to Capital Gains Tax (CGT) Rates

Effective immediately from the October 2024 budget announcement, CGT rates have increased. The lower rate has risen from 10% to 18%, and the higher rate from 20% to 24%, aligning them more closely with income tax rates. This change affects the taxation of gains from asset disposals, including those eligible for Business Asset Disposal Relief (BADR).

tax.org.uk

6. Freezing of IHT Thresholds

The nil-rate band, currently set at £325,000, and the residence nil-rate band, at £175,000, will remain frozen until April 5, 2030. This extended freeze means that, due to inflation and rising asset values, more estates may become liable for IHT over time.

telegraph.co.uk

Implications for Estate Planning

These reforms necessitate a thorough review of estate planning strategies:

• Pension Planning: With pensions becoming subject to IHT, individuals may need to explore alternative vehicles for tax-efficient wealth transfer.
• Business and Agricultural Assets: The capping of APR and BPR requires careful valuation and potential restructuring to mitigate tax liabilities.
• Non-Domiciled Individuals: The shift to a residence-based system and the abolition of the remittance basis will significantly impact tax planning for non-domiciled individuals.

Given the complexity and potential financial impact of these changes, it is advisable to consult with tax professionals to develop tailored strategies that align with the new regulations.