UK Inheritance Tax Reform: Will it stop you leaving your money and property to your spouse or partner tax-free ?

Editor's note: For post-budget 2024 updates and their implications, see end of text. 

Additional taxes are now definitely on the cards for October 2025, given Starmer's back-bench induced U-turns on Winter Fuel and Disability benefit cuts. Reeves will want to avoid breaking manifesto promises by raising employee NI, VAT or income tax. 

What else is there that hasn't yet been targeted ? - yes, you guessed it  - personal IHT rates and tax thresholds. Farmers have already lost their IHT relief with a 20% IHT imposition, so the rest of us are now in the firing line for increases and/or relief removals. The spouse-to-spouse transfer exemption would be a 'juicy morsel' for the exchequer, and they might even be tempted to risk it, now that  marriage is a lot less popular than it was....watch out folks - your widow/widower's financial future could be at risk when you pass on! (mind you, quite a few of the Labour back-benchers are married and some are even 'getting on a bit'....maybe not, then!)

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The Chancellor is up against it trying to find the extra cash she has decided is needed to fill the celebrated 'Tory Black Hole', which she evidently still hasn't managed to get to grips with. There is perhaps a simple reason for this - it keeps expanding....

She first decided to upgrade its value from the original £22Bn to £40Bn last autumn in order to justify funding enhancements to public services, and the additional public sector union pay demands which were settled in full to keep them quiet.  More demands are expected in 2025 - these are already starting to appear in earnest, with the BMA already balloting junior doctors on strike action this autumn, despite yet another above-inflation pay offer). Reeves is also struggling with increases in debt repayment costs arising from the effects of Trump's tariff extravaganza on the markets - happy days....

Both IHT and Capital Gains taxes look like primary targets for extra revenue generation, and the strong hints pre-budget last year were realised by Reeve's attack on family farmers in October (see updates below). Starmer clearly still has further plans for ‘multiple changes’ to IHT, in keeping with his policy of 'slamming the political dissenters' that has coloured many of his decisions since last July. 

In a previous blog I predicted that IHT would be a likely target in future budgets, given the manifesto block on IT, VAT and NI rate changes. I made some speculative guesses about what Reeves might do to increase revenue from IHT, which is a much-hated* tax levied on their assets when someone dies. Sadly, at least some of these predictions have already come true, and more will probably follow. Both Starmer and Reeves would do well to heed the need for caution on this, though - Farage has already suggested Reform would abolish IHT completely, and although the source of funding for this isn't clear, any further increases in the IHT burden could well prove toxic for Labour at the polls. More and more personal estates are valuing above the measly £325k limit, due to ridiculously high house price levels in many areas, so this isn't any longer 'only a tax on the rich'. Beware the wrath of middle England...it can be terminal.

The real problem Starmer and Reeves face is that it's now obvious they have misjudged the ability of the additional revenue streams opened up in October's budget to balance the books. They have also hemmed themselves in by promising not to impose any further increases to the rates** of the 3 main revenue-generating taxes. Reeves consistently  trumpets the need to retain strict fiscal rules on borrowing throughout her tenure, and the markets and the IMF are watching closely for any 'infringements' of these self-imposed rules which might indicate UK 'economic distress'. 

Something else will therefore need to fill the gap, and with the benefits cuts and winter fuel backlash coming home to roost with a vengeance recently, something fairly significant will need to happen to both Capital Gains and IHT to help fill the financial void Reeves has created since Labour took office in July. The only alternative is substantial un-costed borrowing to fund everyday expenditure, and we know from the Truss episode where that leads.....

Business leaders have already issued stern warnings about making the business tax environment too unfriendly by hitting Capital Gains, and thereby ‘frightening off’ entrepreneurs and investors…which leaves IHT looking like the 'softer' option for major increases. Increase in either tax would be likely to ramp-up the exodus of our UK millionaires, who currently provide ca 25% of all tax revenue. (We've reputedly lost ca 11,000 of them to 'pastures new' already since the October budget, with no doubt more to follow as things get worse.)

It’s thus quite likely that many, if not all, of the current reliefs currently available for IHT will go. Taper relief on gifts and trusts for one's offspring are likely to disappear, and Reeves may even reduce or abolish the exemption for spouse to spouse transfers. If she goes this far, there will undoubtedly by a public outcry from so-called ‘Middle England’, who will be hit the hardest.

Such a move would also be likely to split the party down the middle, and result in a major rebellion by some more centre-leaning MPs, fearful for yet more of their better-off constituents' wrath, when it comes to the vote on any major proposals. It’s more likely that Reeves will lower the threshold to £200k and possibly also raise the headline rate to 45% or even 50% to help fill some of the extra 'mass' she keeps adding to the 'Tory Black Hole'.

Not a pretty prospect for anyone wanting to pass on their hard-earned wealth to their children, is it ? 

...And definitely not something that’s likely to help Labour at the ballot box from next May onward, when many of their traditional 'heartland' local government seats come up for re-election.  Labour will be particularly vulnerable to a continued onslaught by Reform. As reported in a previous blog, we have already seen the dramatic effects of Starmer's unpopularity in the recent set of  local council election results. The Tories haven't regained any momentum so far and suffered grievously on May 1st. On present performance things can only get worse for Labour, and Reform is likely to be the principal beneficiary. 

Hopefully the party will soon start to realise they have an electoral liability at the helm, and do something about it....who or what we end up with in charge after that is another story.....

As always, only time will tell.

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* The reason IHT occasions so much hatred in the increasing numbers it affects is that it represents double taxation i.e. the government taxes your income when you earn it initially, and then takes another large slice of your wealth away from your estate when you die, thus depriving your heirs of what most people see as part of their rightful inheritance. As such, it is the only true 'wealth tax' that we're all currently subject to - albeit only after we're dead. 

The tax has wider implications than just reducing the value of an estate to the beneficiaries, though. 

It can, and often does, cause grieving relatives extra pain, since HMRC always insists on immediate payment. This can force the sale of the family house at a loss, sometimes even before probate has been granted, and causes extra grief and financial worry at a time when beneficiaries are most vulnerable. The tax isn't just confined to the 'very rich' nowadays either - the average house price in UK is now well above £200k, with some areas in the home counties approaching £500k, thus wiping out most if not all of the long-frozen £325k allowance. If Reeves lowers this to £200k or below, even more families with only moderate incomes will be drawn into the IHT net. Enough to make you think seriously about emigrating ? Perhaps...but be quick - Reeves may well also slap restrictions on how much of your wealth you can legally export, as 'Old' Labour once did in the those 'happy' times those of who are old enough went through in the 1970s.

** One additional 'fudge' that Labour could adopt to increase tax revenue without breaching manifesto commitment is extending the current freeze on IT thresholds even further. 

Although Reeves didn't actually do this in the October budget, there's a strong chance she will be forced into it this year. She can however only realistically freezing thresholds for the full life of this parliament (i.e to 2029, if it actually lasts that long!). The last government's threshold freeze was due to finish in 2028, and the change would provide an extra £7Bn over the additional 2 years of its life, which might help make the figures look a bit more palatable. She may even go further and raise the basic and/or higher rates by 1 or 2 percentage points, but this would of course guarantee breaking manifesto commitments, and probably set the seal on any chance of re-election; it would also reduce income for the poorest, now that most workers and pensioners have been drawn into the tax net by threshold freezes.

Expect more fireworks after this October's budget - and not just on November 5th !

Update 5.11.24: The general population got off more lightly than expected in the October budget, with no actual reduction in the IHT thresholds, despite a further 2-year extension to the freeze. The headline rate of 40% also stayed the same. The exemption on spouse-to-spouse transfers still remains.

However, if you have a large pension pot that you were planning to leave to your relatives, however, you'd be well-advised to get it spent before you go, since it too will now be subject to IHT when you die. The big losers this time, of course, were the family farmers, who now get 20% IHT applied to their estates on everything valued above £1M when they die, although there are some limited reliefs. 

This has already caused an outcry in the industry, and confirms that Labour are remaining true to their instincts in despising anything rural, despite the pressing need to improve our food self-sufficiency in this crowded little island, which is becoming more and more dependent on imports. I suspect we'll lose quite a few of our small family farms between now and 2029, given the stress they're already under and the uncertainty of any future government subsidies....the only hope for those affected is to transfer ownership to your heirs while you're still alive, and then live at least 7 years thereafter. 

There has been continued resistance to this move, including a significant internal spat between DEFRA and the treasury, so Reeves may yet be forced to backtrack, or at least allow some age-related concessions to allow farmers in their 70s and 80s the chance to take advantage of the tapered relief on gifting. The battle against this chancellor's (and PM's!) many mistaken policies is not over yet. The farming lobby has now taken to the streets in protest, and the pensions industry is gearing up for a fight over the most recent announcement of a shake-up - so far this seems to be focused on public sector pension funds.

Given Reeves' performance so far, we may soon have to invent a new category of 'Britain's Worst Chancellor' to run alongside the current 'Britain's Worst Prime Minister'.....

Update 25.5.25: At last, Starmer's flagship policy changes are starting to crumble to dust...as they deserve. He was forced last week, on pain of a back-bench revolt, to agree to a 'rethink' on Winter Fuel payments and is now even contemplating abolition of the 2-child cap on Universal Credit payments...or so he says. Any change has to wait until the next Budget in October. Starmer will not be able to contemplate reversing the Winter fuel decision completely (as both the Tories and Reform have both promised to do) and still survive as a credible leader - he would simply lose too much 'face'. Some sort of threshold reduction 'fudge' is on the cards for October in the budget, which will be carefully timed to avoid paying out an extra this winter. My guess is that DWP will means-test based on income (probably using the frozen higher rate tax threshold). To do this, of course, they will need to link DWP and HMRC IT systems directly so that the 11 million pensioners can all be checked for eligibility. I wonder how much that little lot will cost them....and how many  system crashes it will involve before it's all properly up and running.

As always, watch this space for developments...

First Published 18.10.24

Updated 27.5.25