Rachel Reeves is reportedly considering additional adjustments to Inheritance Tax, potentially including a limit on lifetime gifting. Currently, gifts made more than seven years before 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%.
According to a report by The Guardian, the Treasury is exploring the option of capping lifetime gifting to address a significant deficit in public finances. This proposed measure is part of broader reforms aimed at stabilizing the economy. Additionally, the Treasury is evaluating modifications to the taper relief for lifetime gifting.
A potential cap on lifetime gifting would restrict the amount individuals can donate, while adjustments to taper relief are also under consideration. A Treasury spokesperson emphasized the government’s focus on economic growth as the primary strategy for strengthening public finances.
Although most families are not affected by Inheritance Tax due to existing exemptions, upcoming changes, such as including pensions in the taxable estate, will impact individuals in the coming years. Inheritance Tax is typically levied on the estate of a deceased person, encompassing property, possessions, and money, with tax due on wealth transferred within seven years of death.
The threshold for Inheritance Tax is currently £325,000, but this can vary based on the recipient of the estate. For instance, transferring assets to a spouse or civil partner can increase the threshold to £500,000. Unused allowances can be transferred in the event of a spouse’s death, potentially enabling couples to pass on up to £1 million tax-free.
In cases where Inheritance Tax is applicable, the standard rate is 40%, but charitable bequests can reduce this rate to 36%. Inherited pensions may be subject to Inheritance Tax from April 2027, affecting how beneficiaries are taxed based on the age of the deceased individual. Death in service payments, however, will remain exempt from Inheritance Tax.