Speculation around the government’s potential plans to reform inheritance tax (IHT) or capital gains tax (CGT) in the upcoming Budget has grown following reports that Chancellor, Rachel Reeves, has reputedly backed down from introducing a flat rate of pension tax relief.

It was reported yesterday (7 October) that Reeves had abandoned potential plans to reduce pension tax relief for higher earners due to concerns about the impact it could have on public sector workers.

Evelyn Partners noted that while other pension tax measures were still possible, this could switch the focus back towards IHT and CGT.

There were several ways in which the government could raise IHT or CGT in the Budget at the end of October, such as cuts to nil-rate bands and business and agricultural property relief, according to Evelyn Partners.

“The taxation of pension pots at death looks like it’s in the crosshairs at the Budget now,” stated Evelyn Partners head of estate planning, Ian Dyall.

“Just a year ago the talk was all about whether the Conservatives would cut or even abolish IHT. But the tables have turned on death duties in the last 12 months, and particularly since the General Election, as Downing Street has admitted the need for more tax rises.

“Rachel Reeves is not short of encouragement from think tanks, a couple of which are keen that IHT ‘loopholes’ should be closed, or that wealthy families should be prevented from making the most of certain reliefs.

“The problem is, one person’s loophole is another’s legitimate relief – or in the case of some family businesses, another’s lifeline.”

Dyall said that restrictions on business and agricultural property reliefs, and bringing defined contribution (DC) pension pots into the calculation of estates for IHT purposes, seemed to be the two frontrunners among the various suggestions to tighten up IHT rules.

However, he also described charging capital gains on the valuation of assets at death as a “dark horse” in any bid to raise more money from the transfer of wealth.

In 2023/24, the Treasury took £7.5bn in IHT receipts, twice as much as 10 years ago, with the tax take increasing in recent years as the frozen nil-rate band exemptions were surpassed by more estates, and more of the wealth in each liable estate.

Receipts are running approximately 9.4 per cent higher so far in this tax year than last tax year, according to data from HMRC.

“While inheritance tax is very unpopular, it does affect only a small proportion of families, about 5 per cent of deaths in 2022/23,” Dyall stated.

“But this is expected to rise in the next decade or two as the asset-rich baby boomer generation hits average life expectancy, which means more estates will be paying IHT, and some will be paying a lot more.

“The Chancellor might judge that it’s an area where revenue can be raised without provoking a widespread outcry. But as the tax raises a relatively modest amount in the overall context of the public finances, you would have to make some fairly aggressive changes to substantially increase the tax take.

“So this could mean that while only a minority of estates would be affected – as long as the nil-rate bands were not cut that is, which would broaden the scope of the tax - the ones that are could be impacted quite severely.”

Following reports that a flat rate of pension tax relief has been abandoned, Evelyn Partners highlighted six possible moves that could feature in the Budget: Cuts to the nil-rate bands; business and agricultural property relief; the AIM shares ‘anomaly’; taxing DC pension pots; crackdown on gifting; and reforming the capital gains at death ‘uplift’ rule.

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