Inheritance Tax Overhaul: What’s at Stake in Reeves’ Budget Bombshell
In a dramatic development that has sent shockwaves through Britain’s financial landscape, inheritance tax (IHT) receipts have surged to a staggering £4.3 billion between April and September 2024, marking a £400 million increase from the previous year. This comes as Chancellor Rachel Reeves prepares to unveil what could be the most significant reform of inheritance tax in recent history.
The timing couldn’t be more crucial. With IHT revenues hitting record highs and mounting pressure to address the £40 billion fiscal target, experts believe sweeping changes are imminent.
The current system, which has kept the main threshold frozen at £325,000 since 2009, is increasingly pulling more middle-class families into its net through what tax experts call “fiscal drag.”
“Only one in 20 estates currently pays inheritance tax, but that number is growing fast,” says Laura Hayward, tax partner at Evelyn Partners. “With rising house prices and frozen thresholds, more families are finding themselves caught in the IHT trap.”
The potential changes under consideration are far-reaching.
- Family Farms at Risk: The government might scrap valuable reliefs that currently allow farmers to pass down their land tax-free.
- Business Property Relief: A possible cap on the 100% relief currently available
- Pension Changes: For the first time, inheritance tax may apply to pensions.
- Rethinking Gift Rules: We could consider extending the seven-year rule for tax-free gifts to ten years.
The impact on London homeowners could be particularly severe. With average house prices in the capital exceeding £500,000, many ordinary families could face unexpected tax bills. “This isn’t just a tax on the wealthy anymore,” warns David Denton from Quilter.
Recent HMRC figures paint a stark picture. In 2021-22:
- 27,800 deaths resulted in an IHT bill.
- The average IHT payment was £215,000.
- Business property relief sheltered £2.9 billion in assets
- Agricultural property relief protected £1.6 billion in assets.
Some experts suggest these changes could help simplify an overly complex system. Andrew Tully, technical services director at Nucleus, notes that advisers can still help clients through various means: “Setting up trusts, using gift allowances, and maximizing pension benefits remain viable strategies for tax-efficient wealth transfer.”
The upcoming budget has also sparked a surge in wealth planning activity. “We’ve seen many people rushing to make substantial gifts this summer,” reveals Hayward. “They’re not just starting the seven-year clock—they’re trying to beat potential capital gains tax increases too.”
For ordinary families, the message is clear: review your estate planning now. With the residential nil-rate band offering an additional £175,000 allowance under specific conditions, married couples can currently pass on up to £1 million tax-free to their children. But this generous allowance might not last much longer.
As Britain awaits next week’s budget announcement, one thing is certain: the landscape of inheritance tax is about to change dramatically. We will have to wait and see if these changes will make the system fairer or simply raise more revenue. But for millions of families across the UK, the stakes have never been higher.