The Treasury is weighing significant reforms to inheritance tax (IHT) in a bid to plug a multibillion-pound hole in public finances ahead of the autumn budget, according to senior sources.
Officials have reportedly been tasked with examining how tighter rules on the gifting of money and assets might raise additional funds, as the government grapples with a revenue-spending gap projected to exceed £40bn. No final decision has been made, but ministers have avoided ruling out tax rises later this year amid sluggish economic growth, stubbornly high inflation, and unemployment now at a four-year peak.
Labour MPs have championed a wealth tax, but adjustments to IHT thresholds are also under active consideration. Chancellor Rachel Reeves and Prime Minister Keir Starmer have hinted in recent interviews that the fiscal strain is too severe to dismiss the possibility of higher taxes.
The government’s election-time pledge not to increase taxes on “working people” leaves the chancellor with a narrow set of options. Rising debt interest payments, Donald Trump’s tariffs, and policy reversals on welfare have widened the deficit, prompting scrutiny of wealth-related taxes as a less politically damaging alternative.
Plan To Limit Lifetime Gifting
One proposal under review is a cap on lifetime gifting, the transfer of money or assets before death to reduce IHT liability. Currently, gifts made more than seven years before death are exempt from the tax. Those given within three to seven years are subject to a sliding “taper relief” rate that declines from 32% to 8%.
Treasury officials are exploring whether to impose a lifetime limit on the value of assets that can be transferred tax-free, while also reassessing the taper rate itself.
“With so much wealth stored in assets like houses that have shot up in value, we have to find ways to better tap into the inheritances of those who can afford to contribute more. It’s hard to make sure these taxes don’t end up with loopholes that undermine their purpose. But we are trying to work out what revenue might be raised and how to ensure it’s a fair approach.”
A source
Although fewer than one in twenty estates pay IHT, the issue remains politically charged. In the late 2000s, the Conservatives gained traction in opinion polls when David Cameron pledged to raise the threshold, branding it a “death tax” and putting pressure on then-Prime Minister Gordon Brown.
Public Backlash Over IHT Reforms
Chancellor Reeves has already faced protests over her decision in last year’s budget to cut tax breaks for farmers passing on their businesses. On Tuesday in Northern Ireland, she defended the move, arguing that farmers with estates over £3m “should make a contribution” and would still pay a lower rate than most.
HMRC data shows just 4.6% of deaths in 2022-23 resulted in IHT being paid. The average effective rate was 13% once reliefs and exemptions were factored in — well below the 40% headline rate.
The government is also targeting the enormous wealth expected to pass from baby boomers in the coming decades, boosted by rising property values and substantial pension pots. Last year, it moved to bring unused pensions into the scope of IHT, with most unspent funds and death benefits taxable from April 2027. But officials remain worried about the loophole that allows withdrawals to be gifted instead, enabling tax avoidance on large cash sums.
As the autumn budget approaches, the debate over inheritance tax is set to intensify, with ministers balancing the political risks of reform against the urgent need to shore up the nation’s finances.
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