UK Shadow Chancellor of the Exchequer Rachel Reeves has caused a ruckus. She’s been greeted with public protests for her recent proposals to eliminate tax breaks for farmers handing off their businesses. What’s behind the new inheritance tax debate? These changes have raised a new and interesting debate about inheritance tax. It now underpins the government’s direction of travel to address an estimated £40 billion black hole.
Reeves and her colleagues are already looking to a range of potential financial incentives. At this stage, they want to hear suggestions on how IHT and CGT should be reformed. These reforms are included in a larger fiscal strategy designed to balance the budget and drive economic growth through increased opportunity. These planning reforms are supposed to bring in £6.8 billion to the economy. This would save taxpayers actual borrowing of at least £3.4 billion.
Inheritance tax reforms have previously produced some of the most vehement public outcry. Although just 4.6% of deaths lead to IHT being paid in full in the tax year 2022-23, the government is continuing to forge ahead with these plans. The average effective rate of IHT is 13%, when taking reliefs and exemptions into account.
Reeves has pointed out that tightening rules on gifting money and assets could be a viable avenue for addressing the revenue-to-spending gap. Currently, gifts seven years before death are exempt from IHT. Gifts made three to seven years before death are taxed with a sliding scale called “taper relief.” The tax rates drop from 32% to 8% over time.
In recent interviews, first Reeves and later Labour leader Keir Starmer have both softened the ground for the public with promises of tax hikes. Reeves underscored IHT and CGT as more realistic options than a more extensive wealth tax. She dismissed the suggestion to go for a simple flat rate of 2% on assets over £10 million. She stated, “I’m not keen to do what Switzerland has done and replace those with a wealth tax because I think there’s the risk of actually losing money by doing those things.”
The government’s proposed inheritance tax reforms are an attempt to plug fiscal holes. These changes are strongly indicative of changing attitudes toward the distribution of wealth in the UK. A source familiar with the ongoing discussions commented, “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.”
Even with the criticism these reforms spawned, Reeves has been quick to highlight her intention to keep working people’s taxes low. “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,” said an unnamed source.
The anticipated reforms extend beyond inheritance tax. Under current plans from April 2027, the majority of unused pension pots and most death benefits will incur tax. Through this action, the administration seeks to ensure that all segments of society pay their fair share to support the nation’s revenue needs. This is particularly critical as the federal government wrestles with increasing public costs.
Advocates and officials alike are currently and urgently looking for ways to change tax policy. They now confront the task of closing loopholes that would otherwise undercut treasures goals. One source noted, “It’s hard to make sure these taxes don’t end up with loopholes that undermine their purpose. We are trying to work out what revenue might be raised and how to ensure it’s a fair approach.”