Why a Budget inheritance tax clampdown could be bad for the property market

Wealthy families are bracing themselves for inheritance tax (IHT) changes in the government's Budget next month.

Chancellor Rachel Reeves has warned of tax rises in her October Budget to address a £22 billion public finances shortfall and IHT could be a target. It comes as increasing numbers of estates have already started falling into to the IHT trap due to frozen tax thresholds, higher house prices and rising asset values.

The Treasury took a record amount of IHT last year and raised £749 million last month, taking the total 2024/25 tax year haul so far to £2.8 billion. This marks an increase of £230 million - or 9% - compared to the same four months last year.

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There are rumours that Reeves could aim to boost that intake by tinkering with IHT to balance the books. This could mean changes to the £300,000 threshold, restrictions on gifting, raising the tax rate from 40% to 45% or 50% or even changing the rules to include pensions in the value of an estate when calculating the IHT bill.

The Institute for Fiscal Studies suggests making pensions part of someone’s estate could raise up to £2 billion per year. Sarah Coles, head of personal finance at Hargreaves Lansdown, suggests this move “isn’t beyond the realms of possibility,” but says there is an outside chance of IHT rates rising.

Whatever the government decides, it also needs to balance its aims with other policy areas. For example, Labour has committed to building more homes and may launch a Freedom to Buy mortgage scheme for first-time buyers. But older generations may be relied on to provide cash for their deposits.  This may be harder if rules on passing money on are toughened-up.

How an inheritance tax overhaul could hit the property market

Research by Savills shows the over-50s own 78% of the UK’s property wealth, with over-65s holding £2.587 trillion net property wealth and 50 to 64-year-olds £2.213 trillion. In total, this adds up to £4.8 trillion. That is a lot of cash that could potentially be released and passed on to younger generations to help them onto the property ladder.

This would be helpful as homebuyers continue to struggle with raising a deposit and high mortgage rates. But equity release provider Key, has warned that the complexity of current IHT rules is already deterring over-50s homeowners and over-65s from releasing cash tied up in their property and further changes may make things worse.

Will Hale, group director at Key Group, has warned against higher taxes on the wealth of older generations as much of the these funds are being used to support younger relatives. He suggests that intergenerational gifting will be crucial to help the government fulfil its housing objectives.

Rather than making IHT more complex, Hale suggests simplifying gifting rules and recognising the role of equity release and later life lending in redistributing property wealth to help younger generations put together deposits to get on the property ladder.

Hale adds “The government’s plan to build 1.5 million houses a year is very welcome but it also needs to ensure people can afford those homes. Recognition for the role of  equity release by older family members in supporting first-time buyers and young families taking their next step up the housing ladder would give a significant boost to the later life lending sector and benefit the overall housing market.”

He suggests that amendments to the seven-year gifting rule when it comes to IHT would be positively received by many and could encourage increased activity from the Bank of Mum and Dad, in turn, putting more money into the housing market “which would have numerous socio-economic benefits.”

How to reduce your IHT bill

It is unclear if there will be changes to IHT and when they would apply. Changes usually take place from the new tax year in the April following the Budget, so there may not be any need to panic for now.

If you are worried, there are steps you can take to reduce the value of your estate while you are alive, such as making use of ISAs and pensions. It is also worth making use of the annual gift allowance of £3,000, plus you can give away larger sums and they will be outside of your estate after seven years.

“Giving gifts makes sense if you were planning to give this money away anyway, and you can afford to part with it,” adds Coles. “However, if you can’t afford it now, don’t let tax anxiety rush you into something you’ll regret.”

There are lots more tips on how to cut inheritance tax in Eight ways to reduce your IHT bill.