As part of her tax increase plan, which sought to raise £40bn, Chancellor Rachel Reeves confirmed adjustments to inheritance tax in the Autumn Budget.
The chancellor stated that she sought to adopt "a balanced approach" in the reform of inheritance tax.
Here is what we know about the changes.
What is inheritance tax?
Inheritance tax is paid out of a person’s estate after they die. The estate could be in the form of property, possessions or money. It is paid at 40 per cent and is charged on the part of the estate that goes above the tax-free threshold, which stands now at £325,000. At present it is estimated that around one in 20 UK estates pay inheritance tax.
However, the rules are complex: there are various tax-free allowances and reliefs available.
One allowance means you can pass your home to a husband, wife or civil partner when you die, without paying any inheritance tax on it.
The tax-free threshold also increases to £500,000 for homeowners if they leave their home to their children or grandchildren, and their estate is worth less than £2 million.
There are also exemptions for things such as agricultural land, businesses and shares in companies.
The percentage of people who pay inheritance tax in the UK is small. Just four per cent of people paid it in 2020-21, according to the Institute for Fiscal Studies.
How much does inheritance tax raise?
The threshold has been frozen at £325,000 since 2009 but bigger estates largely caused by rising house prices have led to more estates becoming liable for the tax.
For the 2023-24 tax year, the government raked in a record £7.5bn from the tax compared with around £5.9 billion in 2021-22.
What changes has the chancellor introduced?
The thresholds for inheritance taxes will be extended for a further two years, until 2030.
Thus, any estate's first £325,000 can continue to be inherited tax-free until that time. The tax rate will remain at 40 per cent after this, but Ms Reeves did not specify what modifications would follow.
Additionally, starting in April 2027, inherited pensions will be subject to inheritance tax, the chancellor declared.
A few less well-known regulations have also been modified, including the ability to transfer agricultural land tax-free and corporate relief.
Ms Reeves announced: “We will close the loophole made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027.
“We will reform agricultural property relief and business relief from April 2026; the first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all.
“But for assets over £1m, inheritance tax will apply with a 50 per cent relief and at an effective rate of 20 per cent. This will ensure we continue to protect small family farms with three-quarters of claims unaffected by these changes.”
How about stamp duty?
In terms of stamp duty, the tax paid when purchasing a property, buyers now have to pay a surcharge of five per cent on second homes and buy-to-let properties.
In the spring of 2025, stamp duty thresholds – the amounts at which purchasers begin to pay the property purchase tax – will decrease but, beginning on October 31, 2024, second-home acquisitions will be subject to the new, higher surcharge.
The lowering of thresholds will have the greatest effect on homebuyers in the most costly regions of England and Northern Ireland, namely London and the South East, because of the high average costs of real estate.
For example, a £425,000 home will incur an additional £6,250 in stamp duty tax for first-time buyers in London.
