As the UK government prepares for the highly anticipated 2025 Autumn Budget, speculation is mounting about potential reforms to the country’s Inheritance Tax (IHT) system. With Rachel Reeves being constrained by her manifesto pledges to keep income tax, VAT and National Insurance at the same level, there is concern that further changes to inheritance tax are coming down the tracks.
Ultimately, this leaves us with the question - Why is IHT reform on the cards again and what does this mean for you?
Current Status of Inheritance Tax Rules
Inheritance Tax has traditionally only impacted on the very wealthy, with only around 4% of estates currently paying it. However, this number is expected to rise as house prices continue to climb and whilst the threshold for IHT remains unchanged. Additionally, the planned introduction of IHT on private pensions passed down to descendants from 2027 will further increase the number of people potentially affected.
Since 2009, individuals have needed to have an estate worth at least £325,000 (if single) or £650,000 (if married or in a civil partnership) before their beneficiaries are required to pay IHT. This is known as the nil-rate band.
For married couples who own a home and leave it to a direct descendant (children or grandchildren), there’s an extra £175,000 allowance – known as the residence nil-rate band, providing their estate is worth below £2,000,000 upon death. Together, this means with careful planning a couple could leave up to £1 million when they pass away without paying any IHT.
However, the £325,000 nil-rate band has remained frozen for 16 years now. As a result, rising property values have pulled more people into the IHT thresholds. If it had kept pace with inflation, the threshold would now be around £580,000, meaning fewer families would be affected.
There are some ways to minimise the amount of IHT paid - by gifting money to beneficiaries while you are still alive.
Proposed Changes
Lifetime Gifting – Introducing a Lifetime Cap
Currently, the UK allows individuals to make gifts without incurring inheritance tax, provided they survive the date of that gift for 7 years. Once this 7-year period has passed, the value is considered out of the estate for IHT purposes.
However, the Government is considering reform here by introducing a lifetime gifting cap. For example, if the government set a lifetime cap of £100,000 for tax-free gifts, any gifting beyond this amount could be subject to an IHT charge from the estate. So, if an individual gifts an additional £200,000, their heirs would face 40% inheritance tax on that amount, resulting in a £80,000 tax bill.
Revisions to the 7-Year Rule
The current 7-year rule allows an individual to survive a 7-year period for a gift to be considered outside their estate for inheritance tax purposes.
There is speculation that the October 25 budget could include an increase the exemption period – instead making it 10 years. The effect is therefore making it more challenging for those looking to pass their wealth down through the generations during lifetime without the fear of an IHT liability on death. This change could therefore force individuals to reconsider their estate planning strategies.
Capital Gains Tax
Speculation if also rife in respect of a major shift in Capital Gains Tax (CGT) rules, which apply when individuals sell assets (such as property or shares) for profit.
At present, when someone inherits an asset, the CGT liability is re-based, with the base cost adjusted to the asset’s value at the date of death. This means if someone inherits their parents’ house and sell it immediately, they only pay CGT on any profit made above the inherited value—typically very little or none.
However, the government may change this approach, requiring families to pay tax on the entire profit at the point of sale, not just the increase in value since the inheritance. This could result in some families facing a double taxation burden—paying CGT of up to 24%, as well as Inheritance Tax at 40%.
What’s next for you?
It’s crucial to understand that, at this stage, these are merely speculations. Making hasty decisions or changes based on rumours could potentially harm your financial situation.
It is always recommended that you remain versed in the options that are available to you in terms of your estate planning. We therefore strongly recommend discussing your estate planning with a qualified professional to ensure you are receiving the best and most up-to-date advice.
At mfg Solicitors LLP, our Tax & Succession Planning Division remain on hand to provide you with the latest expert advice on how to optimise your estate planning keeping asset protection and tax efficiency in mind. Email Scott Vanes at scott.vanes@mfgsolicitors.com or give us a call on 01562 820181.
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