Inheritance tax overhaul: Impact on non-UK individuals

In the UK Budget 2024, significant changes to inheritance tax (IHT) reliefs were announced which may impact non-UK individuals with UK assets. 

We have outlined two scenarios based on the changes announced which may have a significant impact on the GGI client base, particularly where individuals have financial investments or retirement provisions in the UK.

Budget 2025 took place on 26 November and no further material changes were announced relevant to the examples in this article. If you have any concerns about your clients or are looking to confirm the application of these rule changes, please get in touch. 

Business relief

Until 06 April 2026, 100% relief from IHT under Business Relief (BR) is available for shares held in an unlisted trading company. This has commonly meant that non-UK investors in UK businesses do not need to consider their holdings in UK entities when planning for any potential IHT liability in the UK. 

From 06 April 2026, 100% Business Relief for IHT will be removed. Full relief will be available on the first GBP 1 million of qualifying assets held, whilst assets valued over GBP 1 million will be subject to a value reduction before applying IHT at 40%. This is shown below. 

Example:

For an international investor holding GBP 1.5 million of BR-qualifying shares:

• The first GBP 1 million is fully relieved;
• The remaining GBP 500,000 → reduced by 50% = GBO 250,000;
• GBP 250,000 × 40% = GBP 100,000 IHT;
• This results in an effective 20% tax rate on the excess above GBP 1 million.

Pension savings

At present, UK pension funds typically fall outside an individual’s estate for IHT, meaning unused pension wealth can pass to beneficiaries tax-free.

From 06 April 2027, UK pension savings will be included in the estate for IHT. This means pension pots may also be taxed at 40%, depending on the individual’s available allowances.

Example:

For an individual with a taxable estate of GBP 650,000 and pension savings of GBP 300,000:

If death occurs before 06 April 2027:

• Only the GBP 650,000 estate is taxed;
• GBP 650,000 – GBP 325,000 Nil Rate Band = GBP 325,000 × 40% = GBP 130,000 IHT;
• Beneficiaries receive GBP 820,000.

If death occurs after 06 April 2027:

• Estate + pension = GBP 950,000;
• GBP 950,000 – GBP 325,000 = GBP 625,000 × 40% = GBP 250,000 IHT;
• Beneficiaries receive GBP 700,000.
• This change sees an additional tax cost of GBP 120,000 to the total estate. 

Other announced changes

The UK has moved from a domicile-based to a residency-based IHT system from 06 April 2025. This means IHT exposure on non-UK assets is now dependent on where an individual lived during the ten years before their death. Changes to Agricultural Property Relief were also announced in October 2024 applying in the same way as the BR changes noted in this article.

Nikki Martin is a chartered tax adviser in the international tax team at Carpenter Box. She advises internationally mobile and high-net-worth clients on residency, domicile, global mobility, inheritance tax, trusts, and family investment structures.