The Treasury is examining reforms to inheritance tax (IHT) and capital gains tax (CGT) as part of efforts to raise billions of pounds ahead of the autumn budget, with officials tasked with finding ways to address a deficit estimated at more than £40bn.
According to Whitehall sources, one focus is on tightening rules around lifetime gifting – a common method of reducing IHT liabilities. At present, gifts made more than seven years before death are exempt, while those given three to seven years before death are taxed on a sliding “taper relief” scale from 32% to 8%.
A Treasury source said: “With so much wealth stored in assets like houses that have shot up in value, we have to find ways to better tap into the inheritances of those who can afford to contribute more… IHT can raise more, and even if we do nothing, it will raise more as the threshold stays frozen. But we have to look at the levers for taxing wealth if we want to avoid hitting earnings from work as much as possible.”
IHT has long been politically charged. In the late 2000s, the Conservatives gained ground in the polls by pledging to raise the threshold, branding the levy a “death tax”. Today, only 4.6% of estates pay IHT, with an average effective rate of 13% after reliefs, compared with the 40% headline rate.
Chancellor Rachel Reeves has already faced protests over last year’s cut to IHT reliefs for farmers passing on businesses. She argued that those with estates worth more than £3m “should make a contribution” but would still pay a lower rate than others.
The Treasury is also considering raising CGT rates by a few percentage points, potentially paired with allowances for investors who back UK businesses. The aim is to boost revenue without deterring domestic investment.
In 2024, CGT rates were not raised to the levels some in the Labour Party wanted, with Reeves rejecting calls to fully align them with income tax. However, senior figures believe there may be a political path to narrowing that gap.
The government has ruled out a flat-rate wealth tax – like Switzerland’s 2% levy on assets over £10m – but Reeves pointed to IHT and CGT as existing UK tools for taxing the wealthy:
“We have inheritance tax. We have capital gains. We’ve just got rid of the non-dom tax status… I’m not keen to replace those with a wealth tax because I think there’s the risk of actually losing money by doing those things.”
The government’s pledge not to raise income tax, VAT or employee national insurance limits its options for revenue-raising. The deficit has been driven by slowing growth, higher inflation, a four-year high in unemployment, increased debt interest, and external shocks such as Donald Trump’s tariffs.
A Treasury spokesperson said: “We are committed to keeping taxes for working people as low as possible… Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.”
The budget is expected to set out concrete proposals on both IHT and CGT, with officials aware of the political risk of targeting wealth taxes but under mounting pressure to deliver fiscal stability.
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Treasury weighs inheritance and capital gains tax reforms to plug £40bn UK budget gap
