The Treasury is examining ways to raise more revenue from inheritance tax (IHT) as part of efforts to address a growing gap between government spending and income, sources have confirmed. Among the measures under consideration are tighter rules on gifts made before death, including a potential lifetime cap on the value of assets that can be donated tax-free.
Chancellor Rachel Reeves and Prime Minister Keir Starmer have hinted at tax rises in recent interviews, citing pressure on public finances from factors such as higher debt interest payments and Donald Trump's tariffs. However, the government's election pledge not to increase taxes on 'working people' has limited options, making changes to IHT and capital gains tax more likely.
Current rules allow gifts made seven years before death to escape IHT, while those made three to seven years prior are taxed on a sliding scale. Officials are reviewing the taper rate and considering a cap on lifetime gifting to close loopholes. A source said: '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.'
Only 4.6% of estates paid IHT in 2022-23, with an average effective rate of 13% after reliefs. The government has already moved to include most unused pension pots in IHT from April 2027. Reeves faced protests after cutting tax breaks for farmers in last autumn's budget, but defended the move, stating those with over £3m should contribute.
The Treasury is also looking at capital gains tax adjustments to bridge a deficit exceeding £40bn. No final decisions have been made, but the government is under pressure to act amid slowing economic growth and rising unemployment.
