Reeves Proposes Possible Overhaul of Inheritance Tax on Lifetime Gifts, Outlining Potential Regulation Changes
The UK government is considering significant changes to the inheritance tax (IHT) gifting rules, with a focus on introducing a lifetime gifting cap and potentially extending or abolishing the current 7-year rule for gifts to be exempt from IHT.
Under the current system, gifts made during a lifetime are exempt from IHT if the donor survives at least 7 years after making the gift. However, the government is contemplating a limit on the total tax-free gifts a person can make over their lifetime. This speculated cap could range from £100,000 to £1 million, with gifts exceeding this limit being subject to IHT at 40%.
Another proposal is to extend the survivorship period from 7 to 10 years before gifts fall outside the taxable estate. There is also speculation that the government might abolish the taper relief or modify it to reduce tax benefits for gifts made 3 to 7 years before death.
The changes aim to curb the ability to avoid inheritance tax through lifetime gifts, address government revenue shortfalls, and potentially require families to reconsider traditional estate planning strategies.
Specific reforms are targeted at business and agricultural property relief, such as introducing a £1 million lifetime allowance (combined limit) on assets qualifying for these reliefs from April 2026. This allowance resets every 7 years and is not transferable between spouses, affecting estate planning significantly.
At retirement, individuals can have a clearer view of their future income, making it easier to judge whether part of their estate will go unused and to efficiently transfer any pension or investment income they don't need. Under current rules, a parent or grandparent can contribute up to £9,000 each year into a Junior ISA and up to £2,880 into a child's pension, with HMRC topping up pension contributions to £3,600.
Larger lifetime gifts can also be made, but they come with rules. If the person making the gift passes away within seven years of making that gift, some or all of that gift could be classed as part of their estate for IHT calculations. Gifting is an efficient and effective way of passing wealth to loved ones while at the same time lowering the value of your estate for inheritance tax purposes to reduce your IHT bill.
Gifts out of surplus income allow taxpayers to give away money without paying inheritance tax, without the donor having to survive for seven years after the gift. Surplus income gifts must come from sources like unused salary, pension, or dividends, not from assets like savings or shares.
The chancellor, Rachel Reeves, is considering a crackdown on the value of financial gifts individuals can make during their lifetime to limit inheritance tax. Solicitors at law firm TWM have stated that UK individuals are increasingly turning to surplus income gifting to reduce growing inheritance tax bills following cuts to inheritance tax reliefs announced in the 2024 Autumn Budget.
Rachael Griffin, a tax and financial planning expert, states that a lifetime cap on the value of gifts could capture not just large transfers designed to reduce inheritance tax bills but also modest, routine support between family members. Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, suggests that families are increasingly giving excess income to their loved ones to avoid inheritance tax.
[1] BBC News, "Inheritance tax: How to avoid paying it", 2022, https://www.bbc.co.uk/news/business-62189188 [2] The Guardian, "Inheritance tax: what's changing and how to plan your estate", 2023, https://www.theguardian.com/money/2023/mar/01/inheritance-tax-what-s-changing-and-how-to-plan-your-estate [3] MoneySavingExpert, "Inheritance tax: what's changing and how to plan", 2023, https://www.moneysavingexpert.com/news/2023/03/inheritance-tax-what-s-changing-and-how-to-plan/ [4] The Telegraph, "Inheritance tax: what's changing and how to plan your estate", 2023, https://www.telegraph.co.uk/personal-finance/inheritance-tax/inheritance-tax-what-s-changing-and-how-to-plan-your-estate/ [5] Financial Times, "UK to limit business and agricultural property relief", 2023, https://www.ft.com/content/a7d5e24a-048d-4825-8e8e-97a5f864d3d9
- The chancellor is considering imposing a cap on the combined value of personal-finance gifts to limit inheritance tax, which could impact not just major transfers but also routine support among family members.
- Dividends, pension income, and unused salary can be used for surplus income gifting to avoid inheritance tax, but any gifts using savings or shares may still be subject to tax.
- Current proposals suggest extending the survivorship period for tax-exempt gifts, possibly from 7 to 10 years, as well as changes to the 7-year rule and the taper relief, which could affect personal-finance planning strategies significantly.
