The Treasury is exploring ways to increase revenue from inheritance tax (IHT) to address a projected deficit of over £40bn in public finances ahead of the autumn budget, according to sources familiar with the matter. Officials have been tasked with examining tighter rules on gifting money and assets, potentially including a cap on lifetime gifting, as one method to bridge the spending gap.
Currently, gifts made seven years before death escape IHT, while those given three to seven years prior are taxed on a sliding scale from 32% to 8%. Changes under consideration include a lifetime cap on tax-free gifts and a review of the taper relief rate, although no decisions have been finalised. The government has signalled it cannot rule out tax rises, with Chancellor Rachel Reeves and Prime Minister Keir Starmer emphasising the pressure on public finances.
A source told the Guardian: '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.' The source added that even without reform, frozen thresholds will naturally raise more IHT, but 'we have to look at the levers for taxing wealth if the aim is to avoid hitting earnings from work.'
Inheritance tax changes have historically provoked strong public reactions, as seen when David Cameron’s proposals boosted Conservative poll ratings in the late 2000s. Reeves faced protests after cutting tax breaks for farmers in last autumn’s budget, but defended the move, arguing those with over £3m to pass on 'should make a contribution.'
Only 4.6% of deaths resulted in IHT being paid in 2022-23, with an average effective tax rate of 13% versus the 40% headline rate. The government has already moved to bring unused pension pots into IHT from April 2027, but officials worry that large cash sums can still be withdrawn and gifted tax-free. The Treasury continues to study how to tap into the wealth transfer from baby boomers.
