The government is planning to raise more money through inheritance tax in the upcoming Budget, according to reports from the BBC. While the exact details are not yet clear, changes to inheritance tax rules are being considered by Prime Minister Rishi Sunak and Chancellor Rachel Reeves as part of efforts to address a significant budget shortfall.
What Is Inheritance Tax?
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Currently, inheritance tax (IHT) is charged at 40% on the value of an estate—property, money, and possessions—that exceeds the £325,000 threshold. Although only around 4% of deaths result in an inheritance tax charge, the tax generates around £7 billion annually for the government.
However, exemptions and reliefs reduce the burden for many individuals and families, and potential changes to these rules could lead to higher tax bills for some.
Possible Changes on the Horizon
Although it is not yet known how many people will be affected or how much more they may have to pay, the government is reportedly considering adjustments to several IHT exemptions.
These include rules around gifts given while the person is still alive, which can currently escape taxation if given more than seven years before death.
Additionally, exemptions such as Business Relief and Agricultural Relief, which provide tax breaks on certain business assets and farmland, may also be re-examined.
The full extent of the changes will be revealed in the Budget on Wednesday, October 30th. As of now, Treasury officials have declined to comment on specific tax changes, in keeping with their policy of not speculating ahead of fiscal events.
A £40 Billion Shortfall to Address
Ministers are looking to plug what they describe as a £40 billion shortfall between government spending plans and projected tax revenue.
With limited options to increase taxes on individuals—due to Labour’s election promise not to raise income tax, VAT, or National Insurance contributions for workers—the government is reportedly considering other avenues.
One of these options appears to involve increasing the National Insurance contributions paid by employers, which could still affect smaller businesses. This move would technically not violate Labour’s pledge, but it has already sparked criticism.
Budget Theme: “Fixing the Foundations”
Both the prime minister and chancellor have appeared at recent events under the banner “Fixing the Foundations,” signaling that the government is preparing to position the Budget as an opportunity to stabilize public finances and repair what they have described as the economic challenges left by previous administrations.
This focus on fiscal responsibility is likely to frame any difficult decisions on tax hikes and spending cuts as necessary to balance the books.
Tensions Behind the Scenes
Reports suggest that the negotiations leading up to the Budget have caused friction within the government, with certain departments expected to receive less funding than requested.
Labour’s self-imposed borrowing rules may be adjusted to provide some flexibility, but the constraints have led to “significant angst” within the cabinet, according to insiders.
Opposition Response
Shadow Chancellor Jeremy Hunt has criticized Labour for planning to raise taxes, particularly on those who have worked hard to leave an inheritance for their families.
Hunt accused Labour of misleading the public during the election campaign by not admitting their tax-raising plans sooner. He argued that those who have saved responsibly will ultimately bear the brunt of these tax increases.
What’s Next?
As the Budget approaches, the government is expected to finalize its plans for changes to inheritance tax and other measures to address the budget deficit.
The impact of these changes will likely be felt by families, businesses, and individual taxpayers alike, especially those planning to pass on wealth to future generations.
Whether the proposed adjustments will achieve the desired fiscal balance without breaking Labour’s election promises remains to be seen.