Rachel Reeves is reportedly considering implementing further adjustments to Inheritance Tax, with a potential restriction on lifetime gifting, according to a recent report. Currently, gifts made more than seven years before the donor’s death are exempt from Inheritance Tax. Gifts given within three to seven years before death are subject to a tapered tax rate starting at 32%.
The Treasury is said to be exploring the idea of capping lifetime gifting to address a substantial deficit in public finances exceeding £40 billion. This proposal coincides with the announcement of a new Winter Fuel Payment deadline by the Department for Work and Pensions.
The proposed cap would limit the total amount of money or assets an individual can gift, while potential modifications to the taper relief for lifetime gifting are also under review. A Treasury spokesperson emphasized the government’s focus on economic growth as the primary strategy to bolster public finances, citing recent planning reforms expected to boost the economy by £6.8 billion and reduce borrowing by £3.4 billion.
While most families are not subject to Inheritance Tax upon the passing of a loved one, upcoming changes, including the inclusion of pensions in the taxable estate, are on the horizon. Inheritance Tax is levied on the estate of the deceased, consisting of property, possessions, and money, within seven years of death if the estate’s value exceeds £325,000.
Certain exemptions apply, such as no Inheritance Tax when leaving assets to a spouse or civil partner. Transferring a home to children or grandchildren can raise the Inheritance Tax threshold to £500,000. Unused Inheritance Tax allowances can be transferred between spouses or civil partners, potentially enabling couples to pass on up to £1 million tax-free.
In cases where Inheritance Tax is applicable, the standard rate is 40%. Opportunities to reduce the tax burden include a reduced tax rate of 36% if at least 10% of the estate is bequeathed to charity in the will. Inherited pensions may face Inheritance Tax from April 2027, with tax implications varying based on the age of the deceased pension holder.
Inherited pensions will now be subject to Inheritance Tax, while death in service payments remain exempt. These potential changes underscore the evolving landscape of Inheritance Tax regulations impacting individuals and families in the UK.
