UK Inheritance Tax Revenues Surge Amid Proposed Reforms

Recent figures from the Office for National Statistics (ONS) reveal that inheritance tax (IHT) generated £736 million in September alone, bringing the total for the financial year to nearly £4.3 billion. This marks an increase of over 10% compared to the same period last year, highlighting the growing impact of rising asset values on tax revenues.

Currently, inheritance tax is levied at a rate of 40% on assets exceeding £325,000 upon an individual’s death. The tax, often referred to as the “death tax,” has come under scrutiny, with Labour’s shadow chancellor Rachel Reeves considering a range of changes aimed at reforming the system. Among the proposals is a potential extension of the “seven-year rule,” which allows gifts to be passed on tax-free after seven years, to a period of ten years.

Additionally, there is speculation that Reeves may seek to eliminate reliefs on shares listed on the Alternative Investment Market (AIM), along with exemptions for businesses and agricultural land. While these exemptions were initially designed to facilitate the transfer of farms to the next generation, critics argue they have been exploited by wealthier individuals to minimize their estate’s tax liability.

Reeves’ proposed reforms are part of a broader effort to generate additional revenue for the Treasury, which is grappling with a significant fiscal shortfall. Sarah Coles, head of personal finance at Hargreaves Lansdown, emphasized that even without changes, taxpayers could still face rising bills due to frozen income and inheritance tax thresholds, coupled with reduced allowances for capital gains and dividends. “The need for more cash to fill the black hole in the Government’s finances could push up any of these taxes,” Coles noted.

The surge in inheritance tax receipts is largely attributed to increasing asset values over the past year. The FTSE 100 index has risen by 12.5%, and UK house prices saw an average increase of 2.8% in the year leading up to August. These trends, combined with unchanged tax thresholds, have pushed more estates into the IHT bracket.

Beyond inheritance tax, other asset-based taxes are also contributing to government revenues. In September, the stamp duty land tax, imposed on property purchases, generated £1.2 billion, an increase from £1.1 billion the previous year. Similarly, stamp duty on shares brought in £263 million—£40 million more than in 2023—while capital gains tax revenue rose 16% year-on-year to £192 million.

As the government navigates a challenging fiscal landscape, Reeves is expected to outline a series of tax reforms in the upcoming Budget aimed at bolstering revenue streams. These could encompass modifications to inheritance tax, capital gains tax, and potentially new initiatives to address the escalating costs of public services. However, any proposed reforms may face pushback from sectors and individuals likely to bear the brunt of increased tax burdens.