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Chancellor Rachel Reeves is reportedly planning changes to inheritance tax (IHT) in the Budget as she seeks to raise up to £40bn through tax rises and spending cuts.
While the details are still unclear, any changes could significantly affect how much families pay for inherited properties and their financial future.
Here's everything you need to know about the possible changes and what they could mean for your family.
What is inheritance tax?
The inheritance tax is a levy placed on the estate of someone who has died, but only about 4 percent of families end up paying it, as most estates fall below the tax threshold.
The key to this exemption is that anything left to a spouse or civil partner is not subject to inheritance tax, regardless of the value of the estate. Therefore, if a deceased person leaves their entire estate to their partner, even if it is valued at £10 million, they will not be charged any inheritance tax.
However, this exemption does not extend to couples who live together but are not married or in a civil partnership.
Each individual has an inheritance tax-free allowance of £325,000. Estates valued below this threshold pay no taxes, while those above it pay a 40 percent tax on the excess.
What changes could come?
The government has been exploring multiple avenues to increase revenue. Although specific measures for exemptions and relief have not yet been confirmed, discussions include reviewing existing rules on gifts made during a person's lifetime.
A gift given to children is tax-exempt if made more than seven years before the parent's death. These are called potentially exempt transfers (PET).
The October 30 Budget could address specific reliefs for businesses and agricultural land, which currently have tax breaks. However, the extent of the new changes is still unclear.
What has the government said?
Several ministers and the prime minister have promised that taxes will not increase for “workers”, suggesting that the richest are likely to be hardest hit by the new measures.
Ahead of her first budget, the chancellor refused to rule out an increase in capital gains and inheritance tax.
Setting the scene, he said: “I think we will have to increase taxes in the Budget.”
Reeves did not specify which taxes would increase, but said Labor would stick to its manifesto commitment not to increase national insurance, VAT or income tax.
The chancellor said: “We had in our manifesto a commitment to fiscal rules to balance everyday spending through tax revenue and, by the end of the forecast period, reduce debt as a percentage of GDP.
“Those are sensible fiscal rules to control public finances. “We also made other commitments in our manifesto, not to increase national insurance, VAT or income tax for the duration and we will deliver.”
Shadow chancellor Jeremy Hunt criticized Labour's tax plans, saying: “During the election we repeatedly warned that Labor's sums did not add up and that they were planning to raise taxes. The real scandal is that, despite planning these tax increases from the beginning, they did not have the courage to admit it publicly during the election campaign.
“Unfortunately, it looks like it will be the people who have saved all their lives to leave an inheritance for their family who will pay the price for Labour's tax rises.”
What does this mean to you?
It is always worth seeking independent tax planning advice. If inheritance tax rates increase or exemptions are changed, those wishing to leave an inheritance may need to re-evaluate their options to minimize tax liabilities.
