Government considers Inheritance Tax reforms

Tightening gift-giving regulations is among the measures being considered

The UK Treasury is seeking further new ways to reduce the growing deficit ahead of the much-anticipated Autumn Budget. With a financial shortfall exceeding £40 billion, reports suggest that officials, under the guidance of Chancellor Rachel Reeves, are exploring potential changes to Inheritance Tax (IHT) rules. Tightening gifting regulations is just one of the measures being considered to increase revenue and stabilise the country’s finances.

Current market conditions, sluggish economic growth, persistent inflation, and rising unemployment have put significant pressure on public spending. Although there have been calls for a wealth tax, the government is reportedly considering the less politically sensitive option of reforming IHT thresholds.

Potential gifting caps under consideration 

One option being considered is the introduction of a lifetime cap on tax-free gifts. Currently, individuals can pass on assets without tax if these gifts are made at least seven years before their death. Gifts made between three and seven years prior are taxed on a sliding scale, with rates decreasing annually from 32% to 8% in what’s known as “taper relief”.

By implementing a cap, the government could restrict the total value of assets or monetary gifts exempt from IHT rules, regardless of when they are given. This would represent a significant shift in policy and could impact taxpayers involved in long-term estate planning. Other aspects of the gifting framework, including the taper rate itself, are also reportedly being reviewed.

Baby boomers’ wealth transfers under scrutiny 

Alongside organisational reforms, focus is shifting to the vast intergenerational wealth expected to pass from baby boomers. Increasing property prices, substantial pension pots, and accumulated wealth have created a financial landscape the Treasury doesn’t want to overlook.

Last year signalled an early indication of the government’s plans to align pensions with IHT. From April 2027, unused pension funds and most death benefits will be incorporated into the IHT regime, ensuring these assets contribute to government revenue during the largest generational transfer of wealth in history.

Public sentiment and next steps 

If such reforms are implemented, they are likely to spark debate across the political spectrum. While they may succeed in bolstering public finances, concerns over fairness and the potential impact on middle-income families loom large. Conversely, measures specifically targeting ultra-wealthy estates and large-scale gifts could potentially gain broader public acceptance.

The Treasury has not yet confirmed any decision, but it is clear that no revenue-raising strategy is being ruled out. With the Autumn Budget just around the corner, taxpayers would do well to stay informed about potential changes that may impact their estate planning efforts.

If you would like further guidance or professional advice on how potential Inheritance Tax changes could affect your finances or estate planning, please contact us sooner rather than later.

Harrison Pleasance, Senior Tax Manager

CAVEAT 

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED. TAX PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.