Rachel Reeves considers £15bn inheritance tax raid on grieving families

Rachel Reeves is considering imposing inheritance tax on husbands and wives in a potential £15.5billion raid on grieving families, an industry expert warned last night.

Under current rules the entire estate of a person can be left free of inheritance tax to their spouse in what is the largest exemption on the books.

Businesses, farmland, pensions and family homes worth up to £1million are also tax free but are all under threat as the chancellor prepares to grab billions from taxpayers.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said: “We understand that it is the exemptions to inheritance tax that are being most closely looked at.

“The largest of these is the spousal exemption. The figures show £15.5 billion was transferred tax-free to spouses and civil partners during 2020-21.

“This makes it the largest IHT tax break on the books and a very tempting target for the chancellor as even a small reduction in this exemption has the potential to raise a lot of revenue.

“The hope is that because this is such an essential exemption, the government will be wary of making a change that causes potential hardship to so many, and could lead to people being forced to sell their home to pay an inheritance tax bill.”

Seizing 40 per cent of a person’s pension on death is an option said to be favoured by Treasury officials.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “At the moment, pensions can be left free of inheritance tax, which helps protect people from paying tax on money they’ve worked hard to save during their working lives. The government might decide to remove this exemption entirely or place a limit on it.

“This would mean it’s treated similarly to other savings and investments for retirement, including ISAs.

“The government may consider it low-hanging fruit, which is why this particular rumour has been aired more than once in the past few months.

“This change would be a blow to anyone planning to pass on their pension wealth to other family members.

“It would also spur people to spend their pension while they are still alive, whether that be through more gifts to loved ones or through extra spending.”

The owners of family farms are increasingly concerned by reports that the Treasury is considering major changes to the Agricultural Property Relief (APR).

The relief means that farmland and a farmer’s house can be passed on 100% free of tax.

The exemption ensures farms are not broken up or sold to pay tax after one generation to help protect the country’s food security.

Instances of multi-millionaires buying farmland to avoid IHT are rare but Jeremy Clarkson has famously done so, paying £4.45million for the 1000-acre Diddly Squat Farm in the Cotswolds.

National Farmers Union President Tom Bradshaw said: “NFU members are understandably worried and upset.

“Major APR changes would put at risk many farming families’ succession plans and consequently undermine the government’s own ambitions for food and environmental security.

“I’m also very concerned that changes would damage the tenanted sector, as landowners will have much less incentive to let land to agricultural tenants.

“In short, this “Family Farm Tax”, which is what removing APR amounts to, could be too much for some farming businesses which are already struggling with numerous challenges.”

Inheritance tax affects 4% of people with the goivernment taking 40% of everything they own above £325,000.

Charlene Young pensions and savings expert at investment platform AJ Bell said: “Often cited as the UK’s most hated tax, inheritance tax at 40% it is already one of the highest tax rates.

“So it is unlikely we’d see a headline rate increase. What’s more likely is cutting allowances or whittling away certain reliefs to increase the amount some estates pay.”

“A couple leaving their main residence to their children could shelter a £1 million estate from inheritance tax, thanks to two allowances called the nil-rate band and the residence-nil-rate band – but either of these could be cut.”

John O’Connell, chief executive of the TaxPayers’ Alliance, said: “Taxpayers will be dismayed at reports that the chancellor intends to increase inheritance tax in the budget.

“With the threshold already frozen, more and more estates are being hit by this vindictive levy which leaves grieving families with huge tax bills at the worst possible time.

“Rachel Reeves should immediately rule out raising the hated death tax.”

The inheritance tax raid is one of a raft of tax rises considered for the new Labour Government’s first Budget, reports have suggested, as Rachel Reeves meets with City bosses to discuss investment in national infrastructure.

Fuel duty, stamp duty, and a levy on e-cigarettes are among the measures all in Ms Reeves sights on October 30.

 A Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”