Article
The possibility of the current Labour government making changes to Inheritance Tax (IHT) has become a topic of considerable interest. As the Labour Party is historically aligned with wealth redistribution and social justice principles, the potential for reform in this area is high, especially as Keir Starmer and Rachel Reeves have refused to rule out reforms to Inheritance Tax.
Recent Statements and Political Signals
Recent statements by key Labour figures suggest that IHT reform is on the table, albeit not a top priority at present. For instance, Rachel Reeves, the Chancellor of the Exchequer, has emphasized tax fairness and hinted at the need to consider wealth taxes. However, her focus has been more on corporation tax and income tax, reflecting a cautious approach towards IHT, likely due to its complexity and sensitivity.
Anneliese Dodds, Chair of the Labour Party and former Shadow Chancellor, has been more forthright in her criticism of the current tax system’s inequities. During her tenure as Shadow Chancellor, Dodds underscored the need for a more progressive tax system, which could logically extend to reforms in IHT. The fact that such figures are in influential positions within the government suggests that discussions around IHT are ongoing, even if they have not yet translated into policy proposals.
Economic Data and Fiscal Considerations
Economic factors play a significant role in shaping tax policy, and IHT is no exception. The UK’s fiscal position is strained, with high levels of public debt and ongoing demands for increased public spending, particularly during the COVID-19 pandemic and the cost-of-living crisis. In this context, the government may consider IHT a potential additional revenue source.
UK Tax Receipts 2008-2028 (Projected)
According to the most recent data from HM Revenue and Customs (HMRC), Inheritance Tax receipts have been rising steadily. In the 2022-2023 financial year, IHT receipts reached £7.1 billion, up from £5.4 billion in 2018-2019. This increase is partly due to rising property values, which have pushed more estates above the IHT threshold. Despite this, IHT still only accounts for a small percentage of total tax revenues (around 0.8% in 2023), highlighting its limited but symbolic role in the overall tax system.
The Labour government could argue that adjusting IHT—either by lowering the threshold, increasing the rate, or closing loopholes—would generate additional revenue from those most able to pay, aligning with their goals of reducing inequality. However, the potential economic impact of such changes, particularly on middle-class voters who may find themselves unexpectedly liable for IHT due to property inflation, cannot be ignored.
Public Opinion and Political Considerations
Public opinion on IHT is notoriously divided. Polling data consistently shows that while there is broad support for the principle of wealth taxes, many people are opposed to IHT specifically, viewing it as a punitive measure against families who wish to pass on their assets to the next generation.
A 2023 YouGov poll found that 56% of respondents supported the idea of higher taxes on wealth to fund public services, but only 32% supported increasing IHT. This discrepancy reflects a broader challenge for the Labour government. While there is public appetite for addressing wealth inequality, IHT is seen by many as an unfair tax, particularly among older voters and homeowners. This demographic is crucial for Labour to win over if they are to secure a majority in the next general election.
Given this, Labour may be more inclined to pursue less controversial forms of wealth taxation, such as reforms to capital gains tax or the introduction of a new wealth tax, rather than focusing heavily on IHT. However, incremental changes to IHT—such as tightening exemptions or closing loopholes—could be politically feasible and would still align with Labour’s broader goals of tax fairness.
Inheritance Tax Rates By Country
Comparison with Other Countries
Looking at international examples can also provide insight into the likelihood of IHT reform in the UK. Countries like France and the United States have more progressive inheritance tax systems, with higher rates for larger estates and fewer exemptions. In contrast, countries such as Canada and Australia have no inheritance tax at all, instead relying on other forms of wealth taxation.
The UK’s current IHT regime, with its 40% rate on estates above the £325,000 threshold (with an additional allowance for family homes), is somewhere in the middle. However, the existence of various reliefs and exemptions—such as the nil-rate band and business property relief—means that many wealthy estates pay little or no IHT.
Labour could look to countries with more progressive systems as models for reform. For example, France’s system includes progressive rates up to 45%, depending on the size of the inheritance and the relationship between the deceased and the beneficiary. By aligning more closely with these models, Labour could argue that they are modernizing the UK’s tax system to be fairer and more in line with other developed nations.
The likelihood of the current Labour government making changes to Inheritance Tax is significant but not certain. While the ideological underpinnings of the party, recent statements from key cabinet members, and the economic context all point towards potential reforms, the government will need to proceed with caution. Public opinion on IHT is divided, and the financial implications of changes to the tax could be far-reaching.
Incremental adjustments, such as lowering the threshold or closing loopholes, are the most likely outcome. These changes would align with Labour’s broader goals of reducing inequality and ensuring tax fairness without alienating key voter demographics. However, any major overhaul of the IHT system is unlikely in the near term, given the political and economic complexities involved.
