Will inheritance tax change in the Budget?

Another record sum in inheritance tax (IHT) is set to be collected by HMRC this year. Receipts are 9% higher versus a year ago, according to the latest data. The tax take has been steadily increasing thanks to frozen allowances and the increasing value of assets, residential property in particular. In the last tax year (2023/24) IHT receipts totalled £7.5bn, the highest figure ever.

As things stand, the IHT nil-rate bands won’t be reviewed until 2028, which means IHT receipts are only going to rise further from this point. And given the apparent hole in the public finances a further tightening of the rules could increase the tax take further.

What are the IHT rules currently?

Under current rules (2024/25 tax year) an individual’s tax-free allowance is £325,000, with an additional £175,000 available to those leaving the family home to their children or grandchildren. If you are married or in a civil partnership, your estate can pass inheritance tax free to your spouse on your death if this is your wish. This means that the combined threshold for a couple can be as much as £1m.

Above these allowances, the standard IHT rate is 40%. There’s more on how the rules work here.

The £325,000 allowance has been frozen since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020 to help offset this. However, house prices and inflation have risen considerably over this time, meaning many more families are facing a hefty tax bill, especially if adequate planning is not in place.

The good news is there are several strategies you can take to pass on more of your estate tax-free.

Will inheritance tax increase in the Budget?

With the government warning of ‘tough choices’ ahead there has been no shortage of speculation around which taxes might increase in the upcoming Budget. With the ‘baby boomer’ generation hitting their sixties and seventies, and their accumulation of wealth increasingly being passed through their estates and through gifts, inheritance tax and gifting rules could be an area the Chancellor examines.

So, what could happen? It’s very doubtful the rate of inheritance tax would go up. It’s already at a very high 40%. However, it’s possible the nil-rate bands, including the residence nil-rate band, could be in the spotlight.

It’s also possible Ms Reeves could modify the rules around ‘Potentially Exempt Transfers’ whereby gifts (not exceeding a cumulative £325,000) fall outside an estate after seven years. Elsewhere, Labour could also consider charging capital gains tax on inherited assets on top of IHT, resulting in what has been dubbed a ‘double death tax’ on some assets of more than 50%. There may also be consideration of the IHT exempt status of pension funds, which presently fall outside the calculation of an estate.

Finally, there may be scrutiny of the treatment of business assets. Assets that qualify for Business Relief can be passed on inheritance tax free provided they have been owned for at least two years at the time of death.

Business Relief (BR) dates back 40 years with the original aim of ensuring a family-owned trading business could carry on after the death of the owner without having to be sold or broken up to pay a tax bill. Over the years the scope has widened in recognition of the value of continued investment in trading businesses – including unlisted businesses and those listed on the AIM market.

There is no upper limit for BR, and it is possible the Chancellor views it as generous in its current form. However, curtailing it in a significant way is at odds with the government’s assertion that increasing private sector investment a priority to boost the economy. Regarding AIM shares, any move to change their preferable IHT status would go against its previously supportive stance of the City as a vital part of the UK economy.

What can people do?

At the current time, we don’t have any information as to what will or won’t be changed in the Budget. However, if you haven’t already, now could be an opportune time to consider the IHT rules as they stand, who you want to benefit from your assets and whether you and your family might be affected.

Most tax and rule changes don’t occur overnight, so it is likely that you’ll be able to digest any changes outlined in the Budget and respond accordingly. However, if you are concerned about this issue then speak to one of our financial coaches who can offer insights and understanding of your situation and outline the options for professional advice if required.