The seemingly interminable wait for the UK budget (30 October) has seen a fresh burst of speculation about what Chancellor Rachel Reeves will do in areas such as inheritance tax. A UK wealth manager has urged her not to engage in a rushed "grab" for revenue.

Speculation that the UK government could widen the inheritance tax (IHT) net grew more intense late last week. It prompted wealth manager Quilter to state that measured reform, not a “tax grab,” is the best way forward. 

In unusually blunt language for wealth management – a sector that tends to avoid crossing swords politically in public – Quilter said: “If Labour’s reforms are perceived as a hasty tax grab, they are likely to receive significant backlash. Policymakers should tackle IHT reform seriously instead of using it as a political tool and revenue generator.”

Rachel Reeves, Chancellor of the Exchequer, aka finance minister, will deliver her Autumn budget statement on 30 October. For weeks, there has been talk that she could hike capital gains taxes and increase IHT, such as lowering the nil-rate band from its existing £325,000 ($424,105) amount. With CGT, there’s speculation that Reeves will raise it, although exact levels are not known.

The IHT issue is politically sensitive because, under the past Conservative government, the nil-rate band threshold at which an estate is taxed was unchanged for several years and did not keep pace with rising house prices – what is sometimes known as fiscal drag or bracket creep. More taxpayers have fallen under the IHT net. In August, it was reported that receipts for April 2024 to July 2024 have risen to £2.8 billion ($3.66 billion), which is £200 million more than the same period last year.

There are also fears that the government will make it harder to gift money and assets, such as farmland, tax-free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. (The exemption is designed to protect family-run farms.) Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief.

"Inheritance tax is one of the most hated taxes in Britain, often viewed as unfair. The super-rich tend to avoid it by hiring tax advisors to navigate the complex web of reliefs and exemptions,” Rachael Griffin, tax and financial planning expert at Quilter, said. “Consequently, the majority of the annual £7 billion revenue comes from those who are well off, but largely because they have worked hard, saved, and invested diligently throughout their lives.”

“For many, IHT is an emotive issue. Frozen thresholds mean that a growing number of taxpayers have found themselves caught in a whirlpool of ever-evolving tax codes and regulations. In reality, IHT has been ripe for reform and simplification for years, as it is full of impenetrable and irrelevant details that need to be reviewed,” Griffin said. 

“We must hope that any reforms from Labour will tackle these issues rather than simply opting for a quick tax grab by lowering the £325,000 nil rate band. The Conservative Party, under Rishi Sunak, flirted with the idea of reducing, if not abolishing, IHT to woo voters. If Labour’s reforms are perceived as a hasty tax grab, they are likely to receive significant backlash. Policymakers should tackle IHT reform seriously instead of using it as a political tool and revenue generator.

There has been a rising tide of articles saying that more HNW and less-affluent UK citizens are considering leaving, or have left already, because of tax changes.

There is a big debate on how to reconcile redistribution of wealth from the “rich” to the rest of the population while maintaining economic growth. In recent decades, governments have been mindful that if taxes are raised beyond a certain level, revenue is reduced rather than increased because it hurts incentives to work and invest. This is sometimes known as “supply-side economics.”

Reliefs
“For some time, the Labour Party has eyed the reform or even closure of several tax reliefs, such as agricultural and business property relief with a view to potentially removing, capping, or redefining these benefits, which could have the knock-on effect of AIM share losing their inheritance tax break. A move that would seem odd for a government looking to drive growth and investment in UK assets,” Quilter’s Griffin said.

The residence nil rate band (RNRB), an innovation of former Chancellor George Osborne, adds “significant complexity” and is “poorly understood,” Griffin continued.

This incremental allowance of up to £175,000 per person is subject to a ‘qualifying residential interest,’ which broadly means ownership of a residential property that has been occupied as a residence at some point, she said. 

Across the Atlantic, current estate and gift tax exemptions, which are part of a system roughly similar to the UK one, are due to sunset at the end of 2025 unless there’s fresh legislation. US estate tax exemptions are far higher than in the UK. For 2024, the US federal estate tax threshold is $13.61 million for individuals, which means that married couples don't have to pay estate if their estate is worth $27.22 million or less.