As Chancellor Rachel Reeves gears up for the Autumn Budget, inheritance tax (‘IHT’) is back in the spotlight, and this time it’s not just the ultra-wealthy who should be paying attention. With a £50 billion fiscal black hole looming, Reeves is reportedly considering a series of reforms that could reshape how wealth is passed down in Britain.
What’s on the Table?
Following the IHT changes affecting non-doms, businesses and farmers, and the forthcoming pension reforms in April 2027, Reeves’ proposes to target one of the most commonly used IHT mitigation strategies; lifetime gifting.
Currently, generally individuals can gift up to £3,000 annually tax-free, and any gifts made more than seven years before death are generally exempt from IHT, but that may be about to change.
Rumoured proposals include:
- Lifetime Gifting Cap: A limit on the total value of gifts one can make during their lifetime without incurring IHT. This would be a first for the UK and could affect middle-class families, especially in high-property-value areas.
- Extension of the Seven-Year Rule: Gifts made within seven years of death are currently taxed on a sliding scale after using the tax-free nil rate band. Reeves may extend this window to ten years, increasing the likelihood of IHT being applied.
- Taper Relief Revisions: The current tapering system (8% to 40% tax depending on how close the gift was to death) could be scrapped or tightened.
- Frozen Nil-Rate Bands: The £325,000 threshold has been frozen since 2009 and is now set to remain unchanged until 2030, dragging more estates into the IHT net due to rising property prices.
Why the Crackdown?
The Treasury is under pressure to raise revenue without breaching Labour’s pledge not to increase taxes on “working people”. IHT, which affects only about 4% of estates currently, is seen as a politically palatable way to raise funds without touching income tax, VAT, or National Insurance.
Moreover, as mentioned above, Reeves has already announced that unspent pension pots will be subject to IHT from April 2027, aligning them with ISAs and other savings vehicles.
Trusted Tax Advice’s Reaction
A gifting cap could be seen as “intrusive” and may penalise families trying to support younger generations. Such reforms could also stifle economic growth by discouraging intergenerational wealth transfers that fuel spending and investment.
The Balancing Act
Reeves faces a delicate challenge: reforming a complex and unpopular tax without alienating middle-income families or stalling economic momentum. While cracking down on aggressive tax avoidance is broadly supported, the risk is that ordinary families making modest gifts could get caught in the crossfire.
Final Thoughts
IHT reform is always controversial, but Reeves’ proposals could mark a significant shift in how wealth is taxed in the UK. Whether these changes will be seen as fair or punitive remains to be seen, but one thing’s clear, if you’re planning to pass on assets, now’s the time to review your strategy.
Contact Trusted Tax Advice today to discuss your needs.
