Rachel Reeves is reportedly considering implementing new adjustments to Inheritance Tax, potentially including a limit on lifetime gifting. Presently, gifts made more than seven years before the giver’s death are exempt from Inheritance Tax. However, if a gift is given within three to seven years of the giver’s passing, it incurs tax on a decreasing scale called “taper relief,” starting at 32%.
According to a report by The Guardian, the Treasury is contemplating the introduction of a cap on lifetime gifting to address a significant deficit in public finances exceeding £40 billion. This proposal coincides with the recent announcement of a new Winter Fuel Payment deadline by the Department for Work and Pensions.
The proposed cap would restrict the amount of money or asset value an individual can gift, while potential modifications to the taper relief for lifetime gifting are also under consideration by the Treasury. A Treasury spokesperson emphasized the government’s focus on economic growth as the primary strategy for strengthening public finances. They highlighted existing planning reforms expected to boost the economy by £6.8 billion and reduce borrowing by £3.4 billion.
Despite the majority of families not paying Inheritance Tax upon a family member’s death due to existing exemptions, forthcoming changes, such as the inclusion of pensions in Inheritance Tax, are set to take effect in the coming years. Inheritance Tax is typically levied on the estate of a deceased person, encompassing property, possessions, and money, with tax only applicable to estates exceeding £325,000 in value, subject to certain exceptions.
Various provisions exist to mitigate Inheritance Tax liabilities, including the ability to increase the tax threshold by leaving the home to specific relatives. Additionally, couples can potentially pass on up to £1 million without incurring Inheritance Tax, with the standard tax rate set at 40%. Charitable bequests can reduce the Inheritance Tax rate on some assets from 40% to 36%.
Inherited pensions may become subject to Inheritance Tax from April 2027, with taxes applicable depending on the age at which the original pension holder passed away. Inherited pensions will be considered part of the deceased’s estate, potentially impacting the overall Inheritance Tax liability. Notably, death in service payments will remain exempt from Inheritance Tax.
