What is inheritance tax, who pays it and what's changing for farmers?
- Published
A series of changes to inheritance tax rules will raise £2bn a year, Chancellor Rachel Reeves says.
The measures, announced by Reeves in the Budget, include applying the tax to inherited agricultural assets worth more than £1m for the first time. The move has prompted anger among farmers.
What is inheritance tax?
Inheritance tax is charged at 40% on the property, possessions and money, external of somebody who has died, above a £325,000 threshold.
It is only charged on the part of the estate that lies above the threshold. For example, on an estate worth £335,000, the tax would apply to the additional £10,000.
The chancellor said this threshold will now remain in place until 2030.
Inheritance tax must be paid by the end of the sixth month after the person's death, otherwise interest is charged too.
It currently raises about £7bn a year for the government.
How many people pay inheritance tax?
The latest figures, external show that the tax is paid by just over 4% of estates - about 27,800 a year.
However, before the changes announced at the Budget, economists at the Institute for Fiscal Studies think tank predicted that about 7% of estates could be liable for inheritance tax by 2032, external.
Many more people than this believe their family will have to pay the tax after their death.
A YouGov poll for The Times newspaper in July 2023 suggested a third thought they would be liable.
What are the current inheritance tax exemptions and allowances?
There are a number of exemptions, as well as allowances for passing on a home to children, or grandchildren.
These include:
any estate that is valued at less than £325,000 (now fixed until 2030)
anyone who leaves their estate to a husband, wife or civil partner
somebody who leaves it to certain charities or community sports clubs
There are additional, significant allowances.
If the person who dies leaves their home to their children or grandchildren the threshold goes up to £500,000.
Married or civil partners can also transfer assets free of tax between each other, so one partner automatically inherits the other's unused allowance.
So the estate of someone who can use their late partner's allowance, and leaves a home to their children or grandchildren, won't be liable for inheritance tax on anything under £1m.
How are the rules changing for family farms?
From April 2026, tax will be payable for the first time on inherited agricultural assets worth more than £1m.
Under the current rules, small family farms - including land used for crops or rearing animals, as well as farm buildings, cottages and houses - have been handed down through the generations without the need to pay inheritance tax.
As is the case for the rest of the population, there would be no inheritance tax payable on the first £325,000 above that limit, bringing the untaxed total to £1.325m.
The tax due on the portion above that limit would be 20% - half the usual rate.
However, if a farmer is married, they would be able to take advantage of the general exemptions which let them pass assets to their spouse tax-free, or to leave a main residence to children or grandchildren.
That could bring the total untaxed amount for a farming couple to £3m.
The government says the changes will only affect the wealthiest 500 farms each year.
However, the National Farmers Union (NFU) and the Country Land and Business Association (CLA) estimate that up to 70,000 farms could be affected overall.
Many farmers have said they feel "betrayed" by the changes, with protests taking place.
What other IHT changes were announced in the Budget?
The chancellor also announced a number of other changes.
At the moment, inherited pensions are not counted for inheritance tax purposes, but will be included from April 2027.
Reeves also said shares listed on the AIM stock exchange in estates would be taxed at 20%.
Can money still be given as a gift to children before death?
Anyone can give away up to £3,000 a year, and pay no tax. This is known as the annual exemption. If unused, this allowance can be carried over to the following year, up to a maximum of £6,000.
In addition, if you can show that the gift was funded out of income - as opposed to savings - you will not pay inheritance tax. There are also allowances for wedding gifts.
However, if someone gives a bigger sum, then dies within seven years, then the money may be used as part of inheritance tax calculations.
What about using a trust?
Some parents set up a trust in favour of their child, which means they technically no longer own the assets, so they are free from inheritance tax.
But there are different types of trust and some complicated rules - here is the government's guide, external - so it is likely to be worth seeking independent advice.
There are lots of guides to inheritance tax from HM Revenue and Customs, external - which also has a helpline, and here on the Moneyhelper website, external.