The Treasury is considering inheritance tax reforms to help address a £50bn spending gap in public finances ahead of the autumn budget. Chancellor Rachel Reeves (Labour) faces mounting pressure to find new revenue sources after economists warned she must raise taxes or abandon her flagship borrowing rules to fill the substantial shortfall.
The government has already ruled out increases to income tax, national insurance and VAT, limiting available options for raising revenue. Officials are examining options including changing rules to restrict the gifting of money and assets to close potential loopholes.
Current gifting rules under review
Under existing rules, unlimited amounts of money and assets can be gifted to relatives and friends without inheritance tax liability, provided the gifts are made at least seven years before death. Money given less than three years before death faces the full 40% inheritance tax rate, while gifts made between three and seven years qualify for "taper relief" at rates between eight and 32%.
The Treasury is considering a lifetime cap to limit the amount individuals can donate outside of inheritance tax, as well as reviewing rules around the taper rate. The reforms would target wealthy individuals who can afford higher contributions through the inheritance system.
Treasury rationale emerges
"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," a Treasury source said. "It's hard to make sure these taxes don't end up with loopholes that undermine their purpose. But we are trying to work out what revenue might be raised and how to ensure it's a fair approach."
However, no substantive talks at senior level have occurred about inheritance tax, and no decisions have been made. Inheritance tax brought in a record £6.7bn in 2022-2023, making it an attractive target for additional revenue generation.
Implementation concerns mount
Recent analysis showing wealthy investors leaving the UK due to measures such as non-dom status abolition has caused government nervousness about further wealth taxation measures. The Treasury is exploring alternatives including planning reforms expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
A Treasury spokesperson said: "As set out in the plan for change, the best way to strengthen public finances is by growing the economy - which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn. We are committed to keeping taxes for working people as low as possible, which is why at last autumn's budget we protected working people's payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance or VAT."
Sources used: "PA Media" Note: This article has been edited with the help of Artificial Intelligence.
