Government plans to increase IHT to address budget shortfall

The government is considering changes to inheritance tax in an effort to raise additional revenue, the BBC has learned.

While the specific details of the changes remain unclear, discussions are underway about various exemptions and reliefs currently applied to the tax. It is not yet known how many people could be affected or how much more they would pay.

Currently, inheritance tax is charged at a rate of 40% on estates exceeding the £325,000 threshold, generating roughly £7 billion annually for the government. About 4% of deaths in the UK result in an inheritance tax liability. Several exemptions, such as those for gifts made while the donor is still alive, as well as Business Relief and Agricultural Relief, are believed to be under review.

The potential changes come as the government faces a significant budget deficit, reportedly around £40 billion. Ministers argue that a reset of public finances is essential. The upcoming Budget on October 30th is expected to focus on “Fixing the Foundations to Deliver Change,” a theme already emphasised by Prime Minister Rachel Reeves and Chancellor Jeremy Hunt in recent public appearances.

Raising employer National Insurance contributions is another option under consideration, despite Labour’s manifesto pledge not to increase taxes on working individuals. Ministers appear ready to adjust National Insurance for businesses, especially larger employers, though some smaller companies may feel the burden.

The chancellor may loosen the government’s borrowing rules to allow more flexibility, while some departments are likely to face tighter budgets than anticipated.

A Labour source revealed that the spending negotiations have caused considerable tension within the cabinet. Meanwhile, Shadow Chancellor Jeremy Hunt criticised the government’s tax plans, accusing Labour of preparing to raise taxes without being upfront with voters during the election campaign. He argued that those who have worked hard to save for their families may be most affected by these potential tax increases.