Labour has been quizzed about its future plans to hike inheritance tax rates as more estates are becoming subject to the bill.
The 40% levy applies when you inherit total assets valued above certain thresholds, with each individual getting a £325,000 nil-rate alllowance, and an extra £175,000 allowance if they are a direct descendant inheriting an estate that was the main residence of the deceased.
Any unused thresholds can be passed on between civil partners and married couples, meaning when the second partner dies, the successors could inherit up to £1million tax-free.
Rising house prices are dragging more people into being subject to the tax, and Labour announced changes to the tax in Chancellor Rachel Reeves’ Autumn Budget last year, with agricultural and business relief to be reduced from 100% to 50% for assets above £1million from April 2026.
The Chancellor also announced that unused pension savings will also become subject to inheritance tax from April 2027.
Reform UK MP Lee Anderson asked in Parliament if Labour would rule out any increases to inheritance tax coming in the Spring Statement, either through reducing the thresholds or increasing the rates.
Treasury minister James Murray said in response: “The Government set out its plans for inheritance tax at Autumn Budget 2024, including fixing the nil-rate band and residence nil-rate band at their current levels for a further two years in 2028-29 and 2029-30.
“The Government remains committed to one major fiscal event a year to give families and businesses stability and certainty on upcoming tax and spending changes and, in turn, to support the Government’s growth mission.”
If your estate could be liable for inheritance tax, there are several things you can do to reduce your bill. You may qualify for a reduced rate of 36%, down from the standard 40%, if you leave 10% or more of your estate to charity.
You can also reduce the size of your estate by giving away gifts. You can gift up to £3,000 a year split between any number of people tax-free.
You can also give away any number of gifts up to the value of £250 to different people each tax year, as long as you have not used your other gifting allowances when giving amounts to the same people.
Larger gifts above these annual allowances may also be tax-free, but you have to live for another seven years after the gift is given for the amount to avoid an inheritance tax bill.
Another rule to note is you can give gifts out of your excess regular income. Chris Ball, CEO at wealth managers Hoxton Wealth, said people are taking advantage of this tax-free rule ahead of pensions becoming subject to the tax.
He explained: “If you have surplus pension provision, you might want to starting drawing down and gifting early. It’s something we’re seeing a lot of clients do following the Government announcing in its last Budget, that as of April 2027, pensions are set to form part of a deceased’s taxable estate.
“There is an inheritance tax relief that is often overlooked – the regular gifts out of excess income relief. This involves you making regular gifts out of income, these can be at any level but must be regular – and leave sufficient income to maintain your normal living standard.
“Where regular gifts are made from surplus pension income (after income tax), the value exits the donor’s estate immediately rather than the usual seven years and is therefore not subject to inheritance tax.”
Mr Ball said the rule could also be used as a way to put funds into a trust for your successors and avoid a HMRC bill. He said: “This strategy could be utilised to for example, help with a grandchild’s school fees or contribute to a family member’s mortgage payments on a regular basis.”
