Rachel Reeves is reportedly considering implementing additional adjustments to Inheritance Tax, potentially including a limit on lifetime gifting, according to a recent report. Currently, gifts made more than seven years before a person’s death are exempt from Inheritance Tax. Gifts given three to seven years before death are subject to a sliding scale tax called “taper relief,” starting at 32%.
The Treasury is contemplating imposing a cap on lifetime gifting to address a significant financial gap in excess of £40 billion. Concurrently, potential modifications to the taper relief for lifetime gifting are also under review. These changes come amidst other financial updates, such as the new Winter Fuel Payment deadline confirmed by the Department for Work and Pensions.
The proposed cap would restrict the amount of money or asset value individuals can gift, while adjustments to the taper relief system are being explored. A Treasury spokesperson emphasized the government’s focus on economic growth as the primary strategy for strengthening public finances. They highlighted initiatives like planning reforms expected to bolster the economy by £6.8 billion and reduce borrowing by £3.4 billion.
Despite exemptions that shield most families from paying Inheritance Tax, upcoming changes will affect pensions, making them subject to Inheritance Tax. Inheritance Tax applies to a deceased person’s estate, comprising property, possessions, and money. The tax is triggered if the estate value exceeds £325,000, although this threshold can rise significantly based on the recipient of the estate.
For instance, no Inheritance Tax is levied when an estate is bequeathed to a spouse or civil partner. Transferring a home to children or grandchildren can increase the Inheritance Tax threshold to £500,000. Unused allowances can be transferred between married partners, potentially allowing a couple to pass on up to £1 million tax-free. In cases where Inheritance Tax is applicable, the standard rate is 40%.
Strategies exist to reduce Inheritance Tax liabilities, such as a lower tax rate of 36% for assets bequeathed to charity. Inheritance Tax may soon apply to inherited pensions, with tax exemptions for those inheriting pensions from individuals who passed away before or after the age of 75. Furthermore, inherited pensions are slated to be included in the deceased’s estate for Inheritance Tax purposes starting April 2027.