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Economic growth

Treasury Considers Inheritance Tax Changes Amid Growing Financial Pressure

Strategic Insights

— 1 min read

The UK Treasury is exploring ways to increase revenue from inheritance tax (IHT) to address a growing fiscal deficit estimated to reach over £40bn. Officials have been tasked with examining potential changes to the gifting of money and assets, including the possibility of introducing a lifetime cap on gifts made before death to reduce IHT liabilities. This move could be controversial, especially in light of Labour's push for a wealth tax and recent criticisms of IHT changes.

Key Takeaways:

  • The Treasury is considering introducing a lifetime cap on gifts made before death to reduce IHT liabilities.
  • Officials are examining the possibility of changing the taper rate for gifts made three to seven years before death.
  • Only 4.6% of deaths result in IHT being paid, with an average effective tax rate of 13%.
  • The government aims to tap into the vast wave of wealth being transferred from baby boomers through large pension pots and rising house prices.
  • Changes to IHT rules may alter behavior, but it is unclear how this might affect tax revenue.
  • The Treasury is also considering increasing capital gains tax rates by a few percentage points, accompanied by a CGT allowance for investors in British businesses.
  • Some senior government officials believe that a compromise can be reached to equalize CGT rates with income tax.
  • Rachel Reeves has signaled that a flat rate wealth tax of 2% on assets over £10m may be ruled out.
  • Labour MPs, including Rachel Reeves and Keir Starmer, have prepared the ground for tax rises in recent interviews.
  • The Chancellor has pledged not to raise taxes on "working people" in the last election manifesto, limiting options for addressing the deficit.

Statistics:

  • Estimated fiscal deficit: over £40bn.
  • Proportion of deaths resulting in IHT being paid: 4.6%.
  • Average effective tax rate: 13%.
  • Threshold for paying IHT: may be frozen, suggesting that IHT can raise more revenue.
  • Revenue raised by IHT in recent years: few statistics available.
  • Potential revenue from increasing IHT: not explicitly stated.
  • CGT rates not raised to levels of income tax in 2024; may be equalized in the future.

Sources:

  • The Guardian
  • Plan for Change
  • HMRC
  • Labour Party
  • Treasury Spokesperson
  • LBC

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