Inheritance Tax rise would hurt the wrong people

With less than five weeks to go until the Budget the rumour mill continues about how Chancellor Rachel Reeves will square the circle and fill the estimated £50bn black hole in public finances. Ominously government sources are quoted as saying they are looking at “unearned wealth” in the Budget, including assets and property.

Unfortunately, Inheritance Tax (IHT) remains an easy target and homeowners are likely to be asked to pay more from their estates. IHT is currently levied at 40 per cent on all qualifying assets above a £325,000 tax-free allowance, plus an extra £175,000 for anyone passing on a primary residence to a direct relative. Current inheritance tax rules mean unlimited amounts of money and assets can be given as gifts to friends and relatives without paying any eventual inheritance tax, as long as the transfer happens at least seven years before the person giving the gift dies.

With the latest figures from HMRC showing a record £8.2bn in IHT collected from grieving families in the 2024-25 tax year this is an increasingly lucrative tax. This figure is expected to reach nearly £14bn by the end of the decade with the rise in receipts driven by the freeze on tax thresholds which have been at £325,000 since 2009. If the threshold had risen in line with inflation, it would now stand at £523,130.

This hugely unpopular tax – a recent survey found that 54 per cent of the public want the tax to be scrapped altogether – remains an obvious target for Chancellors because your home is an asset you cannot hide.

However, the assumption that homeowners, pensioners and savers will simply sit back and let this happen to them is wrong and any increase in taxation will generate huge behavioural changes.

Wealth managers have already reported an increase in clients giving large amounts of their wealth to family members while equity release advisers said there was a 10 per cent year-on-year increase in the total unlocked from homes in the second quarter of 2025, mainly driven by new borrowers taking £126,422 on average from their properties.

The problem is that any changes to IHT will not hit the wealthiest or those “with the broadest shoulders.” The richest in society have accountants and advisers who are able to severely reduce their liability while the most affected will be those with smaller estates who will be drawn into paying this tax.

The majority of those who will be liable for any increase in IHT liability will be ordinary homeowners who have seen the value of their property increase over the last three decades. But to state that someone who has paid a mortgage and saved all their life is among the wealthiest in society when they may have assets over £325,000 is clearly not a realistic definition of the richest in society.

It can’t be right that this specific group – who have saved, bought a home, and paid into a pension – should be seen as an easy target for increased taxation. This is counter intuitive in any society where the encouragement of thrift, effort, saving, and work is being punished rather than rewarded and these individuals were simply hoping that their lifelong efforts would result in them being able to provide a nest egg for their families.