Inheritance Tax Changes: What to Expect in the Upcoming Budget
In the lead-up to the upcoming Budget on 26 November, Labour faces significant challenges regarding inheritance tax. Chancellor Rachel Reeves has disclosed that the government may need to identify at least £22 billion to balance the fiscal plan. This financial necessity has prompted discussions on various tax reforms.
Inheritance Tax: Current Landscape and Potential Changes
Labour has committed not to increase taxes on working people, specifically ruling out increases in income tax, national insurance, and VAT. Consequently, the government must explore other avenues to generate revenue. Tax expert Dan Neidle referred to this approach as a “scrabble bag” of potential fiscal measures.
Understanding Inheritance Tax
Inheritance tax is applied to the estate of the deceased but only affects about four percent of families. Most estates fall below the £325,000 threshold, meaning they are exempt from taxation. A key aspect of this exemption is that assets left to a spouse or civil partner are not taxed, regardless of the estate’s size.
- Estates below £325,000 are not taxed.
- Estates over this amount face a 40% tax on the excess.
However, this exemption does not apply to cohabiting partners who are not married or in a civil partnership, each having their own £325,000 allowance.
Recent Changes to Inheritance Tax
Labour has already altered inheritance tax parameters in the previous Budget. Notably, the ‘tractor tax’ reforms affecting agricultural property relief are set to take effect in April 2026. This change caps relief on business and agricultural assets at £1 million, introducing a reduced tax rate of 20% on the excess, significantly lower than the standard 40% rate. Tax payments will be staggered over ten years without interest.
- New cap for agriculture relief at £1 million.
- Tax rate reduced to 20% for amounts above the cap.
- Payments to occur over ten years.
Moreover, private pension wealth will also be subject to inheritance tax starting in April 2027. The tax-free allowance is frozen at £325,000 until at least April 2030, a rate that has not changed since 2009.
Future Considerations for Inheritance Tax
Looking ahead, the Treasury might evaluate implementing a cap on lifetime gifts to reduce inheritance tax burdens. Currently, the relief on gifts diminishes over time, with no tax applied to gifts made seven years before death, and up to 40% applied to gifts made just one or two years prior.
- No tax on gifts given seven years before death.
- 32% tax on gifts made three to four years before death.
- 40% tax on gifts given one to two years prior to death.
In addition, the chancellor may consider further extending the freeze on tax-free allowances, which has resulted in substantial revenue. Recent data indicated that HM Revenue and Customs (HMRC) collected £4.4 billion more in six months due to this freeze, making it an appealing option.
As Labour prepares for the November Budget, the inheritance tax landscape is ripe for discussion and reform, reflecting the government’s commitment to ensure that those with the greatest means contribute their fair share.
