Inheritance tax has become a growing issue for many families in the UK, particularly as property prices continue to rise, pushing more estates over the threshold for taxation. The freeze on the inheritance tax threshold, which has remained at £325,000 since 2009, has led to an increase in the number of individuals and families subject to this tax.
As the government grapples with a £40 billion gap in public finances, it is looking at potential changes to inheritance tax policies to help bridge the deficit without directly raising taxes on income earners. This could include measures such as restricting tax-free gifts and tightening rules on estate planning.
A Growing Burden: Why Inheritance Tax is in Focus
Inheritance tax is one of the UK government’s most lucrative revenue streams. According to recent figures, the tax raked in £2.2 billion over just three months in 2025. However, the freeze on the inheritance tax threshold has gradually brought more estates under the tax net as property prices continue to soar. The threshold remains fixed at £325,000, meaning that estates valued above this amount are taxed at 40%, with substantial amounts passing into government coffers.
The freeze, while politically palatable when first introduced, has become a financial burden for many, particularly homeowners in areas where property prices have escalated dramatically. As house prices rise, more families face the prospect of being taxed on inherited wealth they may not have had to pay taxes on previously. According to the National Institute of Economic and Social Research (NIESR), this growing burden is one of the contributing factors to the UK’s public finance shortfall.
Potential Changes on the Horizon: Tightening Rules and Capping Gifts
While there may be no immediate changes to the 40% inheritance tax rate, the way the tax is applied could see significant adjustments. A focus on tighter rules for gifting assets before death is one of the options under discussion. Currently, some individuals transfer wealth to family members during their lifetime to avoid inheritance tax. Tightening these rules could ensure that more assets are taxed upon death, closing a potential loophole.
Additionally, the government could consider capping the amount individuals can gift tax-free during their lifetime. Wealthy individuals often use gifts as a way to reduce the taxable value of their estates, but a cap on such gifts would potentially bring more estates into the inheritance tax net, generating further revenue.
However, the Labour Party, under Rachel Reeves, remains committed to not raising taxes on income earners directly. Therefore, the government is looking at other taxes as part of its broader strategy to address the £40 billion deficit. This includes capital gains tax—which could be further aligned with income tax bands—dividend tax, which has already seen reductions in its tax-free allowance, and even potential wealth taxes on assets above £10 million.
Gambling taxes are another likely target, with a proposed increase in duties on activities like remote gaming and betting, all of which are expected to generate additional revenue. These measures, while potentially controversial, may help fill the fiscal gap without breaching Labour’s commitment to not raising income tax directly.
