Labour's looking at IHT – but we're already paying record amounts

After chancellor Rachel Reeves unveiled a £22bn ‘hole’ in public finances last month, the country is most likely set for some form of tax rises in the October Budget. Having already ruled out increases to national insurance, income tax and VAT, it appears Labour may look to inheritance tax (IHT) and capital gains tax (CGT) to plug the gap – although we have no details of what that might look like. 

But IHT is already at record highs. Statistics released by HMRC at the end of July show that in the 2021-22 tax year, IHT liabilities reached a record £6bn, a 4 per cent rise on the previous year. Some 4.4 per cent of deaths now result in an IHT charge, the highest proportion since 2016-17. Meanwhile, IHT receipts for the period between April 2024 and June 2024 came in at £2.1bn, an £83mn increase on the same period in 2023. 

The seemingly never-ending rise in IHT has largely been driven by increases in property prices, coupled with IHT tax-free thresholds remaining frozen. This has in practice resulted in a stealth tax rise, with inflation eroding the value of what individuals can pass on to their beneficiaries free of tax. 

People can pass on up to £325,000 before any IHT is due, but this IHT nil-rate band has been frozen since 2009. The residence nil-rate band (RNRB), which has been available since 2017 and applies to those who leave their home to their descendants, can boost the tax-free threshold by an additional £175,000. In total, a couple can pass on up to £1mn free of IHT. “Had both bands been uprated with inflation rather than being frozen in 2020, a couple could pass on an estate worth £1,423,000 combined after the second person died,” Charlene Young, AJ Bell pensions and savings expert, explains.

The picture looks more mixed with the latest CGT data. For the 2022-23 tax year, CGT liability stood at £14.4bn, a 15 per cent decrease from last year. But the decline was at least in part due to a sluggish property market and appears to be an exception to a long-term upward trend. The majority of CGT was gathered from a small percentage of people – just 1 per cent of taxpayers made gains of £5mn or more and they owed 41 per cent of total CGT in the year. 

In April, the CGT allowance was halved to £3,000, having already been cut from £12,300 to £6,000 in April 2023. Higher-income taxpayers cashing in investments have already faced a tax hike of up to £1,260 between 2022-23 and 2023-24, and will face a further £600 hike from this year onwards. 

It is hard to plan without knowing what will happen. Investors should not panic and sell assets just out of fear of tax hikes, but those who were thinking of realising gains anyway could consider doing it sooner. If Reeves chooses to raise CGT, there is a possibility that she will push the announcement to the Spring Budget, to give investors a shorter window to sell assets before any tax change comes into effect at the start of the new tax year.