Is Inheritance Tax in Labour’s firing line?
Inheritance tax rules could be tightened in coming weeks to boost the government’s tax take and help it plug some of the £40-plus billion spending gap.
The amount of money that IHT has raised for the Treasury jumped to a record high of £8.2 billion in the 2024/25 tax year, pushed higher by steeper property prices. The government is now reportedly considering introducing a lifetime cap on the amount people can pass on to loved ones before they die in a bid to raise even more money from the tax.
Under current rules, if a parent gives money to their children and survives seven years the gift is not subject to any inheritance tax.
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Ingrid McCleave, partner at city law firm DMH Stallard and tax specialist, said: "If Rachel Reeves proceeds with a tax on gifts, these gifts of deposits may become subject to inheritance tax in the future. Not only are parents that work hard and save having to pay income tax on their salaries and savings, they may after the next budget suffer an additional tax on death, on amounts they have not had the benefit of for possibly years."
Commentators warn that a lifetime cap on gifts could have unintended consequences that may do more harm than good.
James Ward, Head of the Private Client Practice at law firm Kingsley Napley, said: “In my experience, the younger generation have come to rely on the bank of Mum and Dad heavily and with the costs of living and housing at a record high, this reliance is increasing. If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes.
“It will also be very difficult to police a cap concept and will create a challenge for HMRC and a substantial amount of extra paperwork.”
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It’s worth remembering that no changes have actually been announced yet, so although it’s worth considering your position, making any knee-jerk decisions is likely to be unwise.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: “Questions around the future of inheritance tax could encourage people to consider giving gifts during their lifetime while they know where they stand. In addition to potentially exempt transfers, you can give up to £3,000 away each year, which will fall within your annual gift allowance. There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.
“However, it’s absolutely vital not to give money away that you can’t afford to part with. As you get older, your spending needs are likely to change, and some people will need to pay for care, which can have a profound impact on their finances. If you’re not sure what you can afford to give away, it can make a lot of sense to speak to a financial adviser who can model your spending needs and help you avoid handing over too much too soon, and facing horrible challenges as you get older.”