Inheritance tax shakeup on the horizon as Treasury targets wealth to plug UK deficit

The Treasury is actively reviewing reforms to inheritance tax (IHT) in an effort to close a significant gap in the nation’s public finances ahead of the upcoming autumn budget. With the deficit projected to exceed £40bn, officials are exploring the tightening of rules around the gifting of money and assets as one avenue to increase revenue, all while economic growth remains sluggish and unemployment reaches its highest level in four years.

Pressure within the Labour Party continues to mount for a wealth tax, but Chancellor Rachel Reeves and Prime Minister Keir Starmer have so far resisted, hinting instead at adjustments to existing taxes targeting wealth. Reeves has indicated that tax rises cannot be ruled out, given the strain on the public purse, though the government’s manifesto pledges constrain options by promising not to increase income tax, employee national insurance, or VAT for working people.

One possible change under consideration is the implementation of a cap on lifetime gifting. Currently, gifts made more than seven years before death are exempt from IHT, while those given within three to seven years are taxed at a tapering rate. The Treasury is now considering limiting the total amount individuals can gift over their lifetime without incurring tax, and there could be revisions to the taper mechanism itself. These measures would aim to capture more revenue from the wave of wealth transfers boosted by rising house prices and large pension pots among the baby boomer generation.

Despite IHT being paid by less than one in twenty estates—only 4.6% of deaths resulted in a bill in the 2022-23 tax year—the potential political ramifications of changes are significant, as recent opinion swings and public debates have demonstrated. Reeves attracted protest last year after cutting inheritance tax reliefs for farmers with large estates, arguing such estate holders should contribute more. New rules coming into effect from April 2027 will also bring most unused pension pots within the scope of inheritance tax, though the Treasury is concerned about possible loopholes where sums are withdrawn and gifted to avoid the tax.

Capital gains tax (CGT) may also see changes. Policymakers are considering minor rate increases, though any adjustment is likely to be offset by allowances for investment in British businesses, reflecting a desire to raise more from accumulated wealth while maintaining investor confidence. The government’s approach to closing national deficits continues to rely on economic growth, but recent planning reforms alone will not meet the fiscal challenge.

Despite calls from some Labour backbenchers for a Swiss-style wealth tax, Reeves stressed in a recent interview that the UK already has mechanisms to tax the wealthy through IHT, CGT, and the abolition of non-domicile status. She expressed concern that a flat-rate wealth tax could risk diminishing overall tax receipts, hinting instead that reforming existing structures is the preferred path. As the Treasury weighs these critical tax policy choices, the direction set in the autumn budget will be closely watched by financial markets, tax advisers, and families across the UK contemplating the future of their assets.