Key Takeaways
- After changing the rules around inheritance tax and pensions last year, the chancellor is expected to make further changes in the Autumn Budget.
- Though inheritance tax is a levy paid by fewer than 5% of estates, those caught in the IHT regime are increasing.
- Government has a number of options available, including changing the rules on inherited property.
Among the many tax changes expected at the Autumn Budget on Nov. 26, it’s highly likely the chancellor is likely to make further changes to inheritance tax (IHT) rules in a bid to raise revenue for the government. Potential options open to Rachel Reeves include changing rules over gifting and freezing allowances, which is likely to make more estates liable to pay IHT. There’s even the possibility of imposing capital gains on inherited property, an idea floated by an influential think tank.
The Labour government, in power since July 2024, has already started making changes to IHT to increase the tax it brings in. In 2024’s Autumn Budget, the chancellor brought private pension savings into the scope of the IHT regime, a change due to take effect in 2027. At the time, the government said pensions “should not be a vehicle for the accumulation of capital sums for the purposes of inheritance.” Other changes included the tax treatment of AIM, or smaller-company shares, within Individual Savings Accounts.
Nicholas Hyett, investment manager at investment platform Wealth Club, says those likely to pay IHT should expect more from the government in this Budget.
“The Chancellor shook the IHT piggy bank pretty hard last year, but that doesn’t mean she won’t come back looking for more.”
What Is Inheritance Tax and How Could it Change?
This tax is understandably unpopular because individuals have already paid a range of taxes throughout their lives. But fewer than 5% of estates pay IHT.
The “nil-rate band” gives an individual a £325,000 tax-free allowance before paying IHT at 40%; other allowances include a “residential nil-rate band” worth £175,000 brought in by then chancellor, George Osborne in 2017. Because a married couple can combine these bands, the maximum “allowance” for an estate is around £1 million.
And more estates are expected to pay this tax in the coming years. At the Labour government’s first Budget last year, Rachel Reeves froze the IHT thresholds until 2030 and could extend this further in the 2025 Autumn Budget. This “fiscal drag” is likely to increase IHT receipts as house prices grind upward and estates become more valuable with the inclusion of private pensions.
Around 31,500 estates were liable for IHT in the 2022/23 tax year, the government says, a 13% increase on the previous tax year. Receipts are still rising. According to HM Revenue & Customs, IHT receipts rose to £4.4 billion between April and September this tax year, £100 million higher than the same period of the previous tax year. Several options await the chancellor if she does indeed wish this two-decade trend to continue.
Is Lifetime Gifting in Scope for Rachel Reeves?
Changing the gifting rules looks like the most significant of the changes to IHT at the Autumn Budget.
At the moment, cash gifts are exempt from IHT provided the giver stays alive for seven years after the point of donation. This “seven-year rule” could be axed on Nov. 26 and plenty of individuals are reported to have upped gifting to children and grandchildren to get ahead of any potential changes.
“The long-term freeze in IHT allowances is driving an inexorable rise in inheritance taxes, but it won’t deliver a quick tax windfall,” WealthClub’s Hyett says.
“Tinkering with things like IHT relief on AIM shares or putting further restrictions on business and agricultural relief probably doesn’t move the needle in the short term either. Instead, the target for a revenue-raising chancellor is probably [the] gifting rules,” he adds.
If put into effect, one lawyer says the change would be dramatic.
“If introduced, a lifetime cap on tax-free gifts (...) would mark one of the biggest shifts in personal taxation in decades, says Julia Cox, partner at Charles Russell Speechlys.
“The surge in gifting ahead of the Budget reflects growing unease about possible tax changes. Families and business owners are acting quickly while current reliefs remain, highlighting how sensitive wealth planning has become to policy signals.”
One other option for the chancellor is to impose capital gains tax on those who inherit property. Currently those who inherit a property are not liable to pay CGT on the gains made since it was purchased. In many cases, these gains are substantial given the increase in UK property prices in recent decades.
Any change to the tax treatment of property is likely to increase the workload for financial advisors and accountants. It’s also likely to be controversial among voters, who usually don’t pay CGT on primary residences and see their properties as the main way of passing on wealth to the next generation.
How Can I Avoid Paying Further Inheritance Tax?
People concerned about having an increased inheritance tax bill still have options open to them. Under the current rules, gifts taken out of regular income not deemed to affect the giver’s standard of living are free from IHT on day one.
They can also invest in unlisted companies that qualify for business property relief, or BPR. Such investments are typically inheritance tax-free after just two years. But from 2026, investors will only have a £1 million business relief allowance, meaning anything about this figure gets taxed at half the normal rate or 20%, whichever is higher. This is also potentially a risky strategy because of the higher failure rate of unlisted companies.
While ISAs are free from income tax and CGT, they are in scope for inheritance tax. However, investors buying AIM stocks and shares are eligible for IHT relief. Even the clock is ticking on this policy, however. From April 6 next year, the 100% IHT relief on AIM shares will fall to 50%.
The 2024 Autumn Budget’s move to bring pensions into the scope of IHT has triggered a surge in those seeking professional advice to avoid or mitigate taxes on their estates. The increasing complexity of tax rules and allowances is also contributing to this trend.
“With tax thresholds frozen and the potential for further increases, demand for professional financial advice is increasing,” says Paul Mabbett, an independent financial advisor at Truly Independent in the West Midlands.
“People are increasingly seeking to understand the implications of IHT and ways to ensure their wealth is passed on efficiently.”
Budget Uncertainty Is Harming Investors and Savers
“While reforms to gifting rules would inevitably be unpopular, the real problem at the moment is the uncertainty overhanging the Budget,” WealthClub’s Hyett says.
“The government has been clear it plans to raise taxes, but not how it hopes to do so. That risks people taking evasive action to avoid potential changes, and time pressured decisions taken to avoid rumored tax changes are rarely optimal. The lack of clarity creates a real risk of financial pain further down the road.”
One example is possible changes to the pensions tax regime, which are encouraging some people to take lump sums ahead of the Budget.
James Gard contributed to this article.
