All the inheritance tax changes that could be made at Budget

Economists say Rachel Reeves must balance revenue needs and backlash, making the controversial tax a key focus

Rachel Reeves could unveil a series of inheritance tax (IHT) reforms in next month’s Budget, experts have told The i Paper.

The tax – often dubbed Britain’s “most hated” – is charged at 40 per cent on the portion of someone’s assets above £325,000, though there are multiple exemptions and extra allowances that mean many pay less.

It affects only around 4 per cent of estates according to recent figures, but frozen thresholds and rising property prices mean more families are being pulled into its net each year.

Speculation is mounting that Reeves may target IHT for reform on 26 November, as the Treasury looks for fresh sources of revenue.

Last year’s decision to include pension savings within the scope of IHT from April 2027 was one of the biggest shake-ups to the system in years, but experts say further tweaks could be on the cards.

Currently, individuals can pass on up to £325,000 tax-free, while couples benefit from a combined £650,000 allowance.

On top of this, estates that include a family home passed to direct descendants can claim an extra £175,000 each, meaning a married couple can potentially leave up to £1m tax-free.

However, with property values soaring since those thresholds were set, an increasing number of middle-class families are being dragged into paying IHT.

The planned inclusion of pensions is expected to expand that even further.

Under current rules, people can reduce their potential IHT bill by gifting assets during their lifetime.

These gifts are tax-free if the donor survives seven years after making them. If not, tax is applied on a sliding scale – 40 per cent if they die within three years, tapering to 8 per cent if death occurs between six and seven years later.

Some gifts are always exempt, including up to £3,000 per year, small gifts of up to £250 per person, wedding gifts within limits, and regular gifts made from surplus income. Transfers between spouses remain entirely exempt.

What to expect in the Budget

No decisions have yet been confirmed, but economists say Reeves faces a delicate balancing act between raising much-needed revenue and avoiding a political backlash.

After years of frozen thresholds and new rules bringing pensions into the IHT net, the levy could be one of the most closely watched aspects of Labour’s second Autumn Budget.

Nimesh Shah, chief executive of Blick Rothenberg, believes the Government could extend the seven-year gifting rule to 10 years. He also thinks a US-style lifetime cap on gifts might be on the table.

Mr Shah explained: “Presently, gifts can be made up to an unlimited amount – provided the donor survives more than seven years, the value of the gift does not need to be taken into account for calculating the IHT on death. But the Government could introduce a lifetime cap.

“You may want to make a gift now under the present rules so that such a gift does not come within any cap – however, I expect the design of such a cap would cover any gifts made in the last seven to 10 years and so the action may be ineffective depending on how the rules are established.”

Stephen Barber, professor of global affairs at the University of East London, shares that view. He also expects the gifting period could be extended and a lifetime cap introduced.

He explained: “This would mean, they would hope, more assets are potentially included within an estate for IHT calculations.

“While on the face of it this might seem attractive, as always, they are unlikely to solve the Chancellor’s immediate problem.

“Over a longer period, it would prove very difficult to calculate accumulative gifting with accuracy and auditing costly.

“This might also incentivise those with considerable assets to make transfers now or indeed use vehicle such as trusts. After all, any tax change incentivises behaviour changes.”

However, not all experts expect Reeves to make another move on IHT so soon after what one described as last year’s “seismic changes”.

Rowan Morrow-McDade, tax director at Alexander & Co Chartered Accountants, said he would be “somewhat surprised” if Reeves targeted IHT again this year.

He said: “IHT makes up less than 1 per cent of the UK tax take, so any changes to it would be minor tinkering around the edge in terms of the revenue that she wants to raise.”

Even so, he believes the Chancellor could consider extending the potentially exempt transfer window or scrapping or limiting the “gifts out of income” exemption – which currently allows unlimited gifts from income to children without triggering IHT.

He also suggests taper relief could be reduced or abolished. This relief reduces the IHT due on gifts depending on how long before death they were made.

He added: “As this generally only benefits wealthy individuals, the gift broadly needs to be above £325,000 for taper relief to apply – it could well be in the crosshairs for a Labour Budget.”

For now, advisers agree the most obvious tax strategy remains unchanged – make any large gifts sooner rather than later.

How to reduce the impact of potential IHT changes

For now, experts generally recommend working within current IHT rules, and this means taking advantage of allowance and exemptions.

Make the most of annual exemptions and gifts

Each year, you can give away up to £3,000 without it counting towards IHT.

Small gifts for birthdays or weddings within the limits are also exempt – and while they may seem modest, they can add up over time, Rosie Hooper, chartered financial planner at Quilter Cheviot, said.

She added: “Larger gifts can also become tax-free if you survive seven years after making them.

“Getting into the habit of gifting early and often can be one of the simplest and most cost-effective ways to pass on wealth tax efficiently.”

Using trusts to move assets outside your estate

When you put money or property in a trust, provided certain conditions are met, you no longer own it. This means that it’s possible it may not count towards your inheritance tax bill when you die

Trusts, which are a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of someone else can help families transfer wealth while keeping some control over how it’s used, Ms Hooper explained.

Hooper said: “Depending on the type of trust you choose, assets placed inside it may fall outside of your estate after a period of time for IHT purposes.

“There are several forms of trust, each with slightly different tax rules and levels of control. For families who want to provide long-term financial security for children or grandchildren while managing IHT exposure, a well-structured trust can be a valuable planning tool.”

Enjoy your wealth now

Another straightforward way to reduce your estate’s value is simply to spend more during your lifetime.

Supporting family members, helping with big milestones, or enjoying experiences together allows you to see the benefit of your wealth while gradually reducing your IHT liability.

With good advice and budgeting, it’s possible to do this without jeopardising long-term financial security.

Getting married

While it may not be the most romantic motive, marriage can make a significant difference for IHT purposes, Robert Salter, director at Blick Rothenberg, said.

He explained that transfers between spouses or civil partners are free from IHT, both during life and on death. By contrast, assets left to a common-law partner are liable to IHT, apart from the £325,000 exemption.

He said: “Hence in this context marriage is sensible tax planning.”