Inheritance Tax Shake-up: £15 Billion Marriage Tax Break at Risk in New Budget
In a move that could reshape family estate planning across the UK, Chancellor Rachel Reeves is considering significant changes to inheritance tax rules that could affect millions of married couples.
The Treasury’s potential reform of the ‘spousal exemption’, a longstanding tax break that helps protect family wealth, signals a major shift in how the government approaches inheritance taxation.
Breaking Down the Numbers Currently, married couples enjoy unlimited tax-free transfers of assets between spouses, a benefit that sheltered £15.5 billion in wealth during 2021–22 alone.
This makes it the most valuable inheritance tax relief by far, dwarfing other benefits like the business property relief, which protected just £3 billion in the same period.
What’s Changing? The proposed changes could include:
- There is a cap of £10 million on tax-free transfers between spouses.
- There are new limitations on how wealthy families can utilize the exemption.
- There could be modifications to the agricultural and business relief caps.
Why Now? The timing of this potential reform isn’t random. With the budget announcement set for October 30, the Treasury is searching for ways to fill a £22 billion gap in public finances. This inheritance tax overhaul is part of a broader £35 billion tax strategy being considered by the Chancellor.
The rich get richer? Current data reveals an interesting pattern: families inheriting estates worth £10 million actually pay a lower effective tax rate (20%) than those inheriting smaller estates worth £3–4 million (25%). This disparity exists because wealthy families can better use available tax breaks, including:
- The spousal exemption
- Agricultural relief through farmland purchases
- Business property relief
Expert Opinions David Denton, a tax expert at Quilter Cheviot, warns that capping the spousal exemption could backfire: “While the revenue gains would be minimal, we risk driving away high-net-worth individuals from the UK, potentially harming our economy.”
Sarah Coles from Hargreaves Lansdown adds a cautionary note: “Even with a £10 million cap, changing a 50-year-old rule might worry people that further restrictions could follow.”
What This Means for Average Families The current inheritance tax rules have significant implications for most families.
- Each individual receives a tax-free allowance of £325,000.
- Direct descendants receive an additional £175,000 allowance when they inherit a main home.
- Married couples can combine these allowances, potentially protecting up to £1 million.
Looking Ahead Despite the Treasury’s lack of confirmation on these changes, the government must delicately strike a balance. They’ve promised not to increase:
- National Insurance
- There are basic, higher, or additional income tax rates.
- VAT
This leaves inheritance tax as one of the few remaining options for increasing revenue without breaking these pledges.
The Bottom Line The proposed changes would affect fewer than 100 estates per year—less than 0.1% of all inheritances. However, the symbolic impact of altering this long-standing tax break could have broader implications for how wealthy families approach estate planning in the UK.
As we await the budget announcement, financial advisers are already preparing their clients for potential changes. For now, the message is clear: significant changes to inheritance tax rules are on the horizon, and families need to stay informed about how these changes might affect their estate planning strategies.