Potential negative impacts of strict inheritance tax laws on the real estate sector
The UK's October 2025 Budget is set to introduce significant changes to the inheritance tax (IHT) rules, potentially affecting estate planning and the property market.
Key potential changes include tightening the 7-year exemption rule for gifts before death, shortening it, introducing a tapering system with higher rates, taxing some gifts immediately, or extending the exemption period to 10 years. Additionally, a lifetime gifting cap might be introduced, with amounts above the cap subject to IHT on death.
These changes could lead to higher combined IHT and Capital Gains Tax (CGT) taxes on inherited properties, potentially disincentivizing holding onto inherited residential or business property, increasing selling pressure. Liquidity pressures arising from higher IHT on gifts and estates may lead some inheritors, including farmers and family businesses, to sell property assets to meet tax bills.
Increased tax burdens could also reduce intergenerational wealth transfers via property, potentially cooling segments of the housing market reliant on such transfers. Conversely, with frozen income tax thresholds pushing more people into higher CGT bands, inheritors selling property may face larger tax bills, affecting selling decisions and market dynamics.
Advisers recommend early estate planning and a review of wills, including assessing reliefs like Agricultural and Business Property Reliefs to mitigate the impact of reforms.
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. Higher taxes on the wealth of older generations may affect funds used to support younger relatives.
Simplifying gifting rules and recognizing the role of equity release and later life lending in redistributing property wealth could benefit the housing market. The government's plan to build 1.5 million houses a year could also benefit from recognition for the role of equity release by older family members in supporting first-time buyers and young families.
The Chancellor, Rachel Reeves, has warned of tax rises in her October Budget, aimed at addressing a £22 billion public finances shortfall. Inheritance tax could be a target for these tax rises.
Sources:
- The Telegraph
- The Guardian
- Financial Times
- Property Industry Eye
- Key Group
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