Rachel Reeves, the UK’s Chancellor, is considering bold changes to inheritance tax—an issue touching thousands of families and provoking passionate debate across the country. Her plans, designed to address spiralling public spending and social investment, could reshape how Britons plan for the future and pass on wealth to the next generation.
The Current Inheritance Tax System
Inheritance tax is paid on estates valued over £325,000, with a rate of 40% applied to the value above this threshold. When main homes are passed to direct descendants, the tax-free allowance increases to £500,000 per person, meaning couples can potentially pass on up to £1 million before tax is due. Under current law, gifts given more than seven years before death are usually exempt, making early estate planning key for many British families.
The ‘residence nil-rate band’ is a vital element—enabling families to pass on property with less tax exposure. These widely used allowances have shaped inheritance thinking for years, with many households relying on them to protect their financial legacy.
Why Change Inheritance Tax?
With a looming £50 billion public finance black hole, the government is under pressure to find new revenue while supporting vital public services. Reeves and her advisers have suggested that inheritance tax offers a way to make the system “fairer”, while also helping close loopholes that mainly benefit wealthier estates.
Some reports suggest Reeves’ team is targeting what they call “legal but aggressive” estate planning. Wealthy individuals often make early gifts to their children to move assets out of their estate, thus sidestepping inheritance tax. Gifts made within seven years are liable to taper relief—meaning the sooner wealth is transferred, the less tax that might be due. Critics argue this enables substantial estates to shield large assets from the taxman, undermining the goal of inheritance tax as a redistributive tool.
Rachel Reeves’ Proposed Reforms
According to several credible sources, Reeves is contemplating several changes that could have broad impact for British households:
- The abolition or restriction of the ‘residence nil-rate band,’ potentially reducing the tax-free allowance for property passed to direct descendants.
- Shortening or even scrapping the seven-year gift exemption period—meaning lifetime gifts could be taxed for longer or even immediately.
- Ending or reducing taper relief, making gifts made more than three years before death less tax advantageous.
- Introducing new immediate taxes or lower lifetime gift exemptions, hitting those passing on larger assets before death.
If these changes are enacted, they could significantly raise what middle-class families pay, as well as wealthy households. Early calculations suggest the average homeowner’s bill could rise by as much as £82,000 under some scenarios.
Impact on UK Families
For many British families, these proposed reforms could transform estate planning. Where strategic gifting has helped avoid IHT, future gifts may face higher immediate taxes or remain within the estate for longer periods, increasing overall tax liability.
Families who planned to gift homes, savings or other assets while still alive to support younger generations may need to rethink their strategies, especially if the seven-year rule is shortened or abolished. The move may be praised by those seeking a more progressive system, but concerns remain about its effect on those at the margins of the taxable threshold.
Reactions and Political Debate
While the government insists that major changes like abolishing the residence nil-rate band have not been ruled in or out, the signals are clear that inheritance tax reform is firmly on the agenda. Treasury officials have indicated a desire to target “unearned wealth,” aiming policies at large estates and property holdings rather than “working people”.
Opinions are divided. Supporters of reform argue wealthier families have benefited from loopholes for too long, and that reform is essential to fund the NHS, schools, and infrastructure. Critics, however, warn that the changes could penalise those who, by working and saving over decades, have accumulated assets just above the threshold—particularly as property values rise across the UK.
International and Non-Dom Changes
A further significant change coming in April 2025 is the move from a domicile-based system to one based on long-term residence. The new rules will mean that anyone resident in the UK for at least ten out of the past twenty years will be liable to UK inheritance tax on all worldwide assets. This ends an exemption that previously benefited non-domiciled families, ensuring that those who’ve made the UK their primary home contribute more when transferring wealth internationally.
What Happens Next?
Rachel Reeves’ inheritance tax plans, though still under consultation, have captured the UK’s attention. Any reforms will come under close scrutiny from the public and financial experts, with the potential to shape Labour’s economic reputation for years to come. Whatever the final policy, the outcome will mark a turning point in how British families plan, gift, and protect their wealth—while reigniting the long-running debate about fairness, fiscal responsibility, and opportunity for future generations.
