The recent UK Budget has introduced significant changes to Inheritance Tax (IHT), notably bringing unused pension funds into the IHT net and altering the treatment of agricultural and business assets. These reforms necessitate a strategic reassessment of wealth preservation methods to ensure that family legacies remain intact.
From 6 April 2027, most unused pension funds and death benefits will be included in the value of a person’s estate for IHT purposes. This marks a departure from the previous treatment, where pensions were generally exempt from IHT. Consequently, individuals may need to reconsider their pension contribution strategies and explore alternative investment avenues to mitigate potential tax liabilities.
In addition to pension changes, the Budget has reformed the treatment of agricultural and business assets. The government has announced that from 6 April 2026, the existing 100% rate of tax relief under Agricultural Property Relief (APR) and Business Property Relief (BPR) will continue to be available, but it will be limited to the first £1 million of property qualifying for APR and BPR only. Any qualifying assets over this new £1 million allowance would be eligible for a reduced 50% tax relief, effectively imposing an IHT rate of 20% on the excess value.
These changes underscore the importance of diversifying investment portfolios. Alternative investments, such as commercial property, fixed-income bonds, and equities, offer opportunities to balance risk and return. For instance, fixed-income bonds can provide consistent yields, serving as a stabilising component in a diversified portfolio. Engaging with financial advisers and portfolio managers is crucial to navigate these complexities and develop strategies that align with individual financial goals.
The reduction in IHT relief on AIM shares from 100% to 50% from April 2026 means that investors will face an effective tax rate of 20% on these assets. This change diminishes the attractiveness of AIM shares as a tax-efficient investment vehicle.
However, this does not render AIM investments obsolete. Investors should consider the broader benefits of AIM shares, such as potential for high returns and portfolio diversification. A balanced approach, incorporating both traditional and alternative investments, can help mitigate the impact of these tax changes.
Strategic planning is essential in this evolving tax landscape. Diversification remains a cornerstone of wealth preservation. By combining various investment strategies—ranging from business structuring to investment diversification, and from lifetime giving to private equity investment—families can create robust wealth preservation structures within the new tax framework. This holistic approach ensures that wealth is not only protected but also positioned for growth, securing financial legacies for future generations.
In conclusion, while the recent IHT reforms present challenges, they also offer opportunities for proactive wealth management. By embracing diversification and strategic planning, individuals can navigate these changes effectively, safeguarding their financial futures and those of their beneficiaries.
(Source: CITY AM)