Changing inheritance tax and its potential implications for individuals: An exploration of options for Rachel Reeves.
The UK government is considering significant reforms to the inheritance tax (IHT) gifting rules, aiming to increase revenue and tighten the rules on how gifts reduce the taxable estate.
Currently, individuals can make unlimited lifetime gifts that become exempt from IHT if they survive seven years after gifting. However, the government is considering capping the total value of lifetime gifts that are exempt from IHT, such as a proposed cap of £100,000. This means any gifts over that threshold could be subject to a 40% IHT charge on death.
Another proposed change is extending the exemption period from 7 to 10 years, making it harder for people to reduce their estates via gifting during their lifetime. This could force individuals to reconsider estate planning strategies since gifts would remain liable to IHT for a longer time after being made.
Other potential measures include tightening rules to prevent early pension withdrawals used to gift funds ahead of a combined high inheritance and income tax rate that takes effect in 2027, and introducing real-time reporting of gifts to HMRC.
The impact of these changes could be substantial. Individuals may face:
- Reduced ability to transfer wealth tax-free during their lifetime, as a lifetime cap would limit total tax-free gifts.
- Increased IHT liabilities for heirs if gifts exceed the cap or fall within a longer exemption period.
- More complex estate planning needed to navigate new caps and changes to reliefs such as business and agricultural property reliefs, which also face new caps and conditions from 2026.
- Possible behavioural shifts, where individuals might keep assets within their estates longer, transferring wealth only upon death, potentially affecting liquidity and overall IHT receipts.
These changes could represent the most significant tightening of personal IHT rules in decades, with major implications for intergenerational wealth transfer and tax planning in the UK. The Autumn Budget, scheduled for two months from now, may provide more details on these proposed reforms.
[1] Daniel Hough suggests that there are important discussions to have about the sustainability of one's retirement pot and that may require scaling back ambitions. [2] Rachel Griffin suggests that a lifetime gifting cap could capture not just large transfers designed to reduce tax bills but also modest, routine support between family members. [3] Gianpaolo Mantini suggests that Reeves could introduce lifetime capital transfer charges, as is already the case with trusts. [4] Ingrid McCleaver states that a lifetime cap could spell the end of the 'bank of mum and dad', with children who receive a house deposit potentially facing an IHT bill. [5] The Treasury is reviewing taper relief rules, which tend only to benefit the very wealthy, according to advisers. [6] Experts advise against making drastic changes, as there is a fine line between passing down wealth as efficiently as possible and enjoying a comfortable retirement. [7] IHT has historically only affected the very wealthy, with just 4% of estates paying it.
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