The gift that keeps on giving? How the Budget could squeeze more from IHT

In summary

• Speculation is growing that Rachel Reeves could change the rules around the inheritance tax treatment of gifts made during a donor’s life 
• Currently, gifts are IHT-free if the donor lives another seven years after giving 
• The Budget could potentially scrap or amend the seven-year rule or introduce a lifetime limit on the assets donors can give away without a tax charge

Among the rumours and speculation about potential tax changes in the Autumn Budget, inheritance tax keeps coming up. IHT receipts are already at record levels, pulling in £8.2bn in revenue for the government in the last tax year, as frozen allowances (since April 2009), inflationary asset value growth and other factors drag more families into paying the tax. 

With thresholds already frozen until 2030, pensions to be included in estates for IHT from April 2027, and reductions in agricultural and business property relief proposed from April 2026, where could Rachel Reeves look to bolster funds from IHT yet further?  

The rules on gifts have come in for particular comment. 

Lifetime gifts, other than into trust, are currently exempt from inheritance tax at the time of the gift. However, they are, to use the technical term, only “potentially exempt transfers”; if the donor dies within seven years of making the gift, the assets will be included in the estate when calculating IHT.  

If this happens, the amount of tax charged will vary according to the time between the gift and the death, with the rate beginning to reduce after three years. After seven years, the gift will be IHT free. 

The tapering of the reduction in IHT for this “seven-year rule” is currently as follows:  

• If the donor dies within three years of making the gift, the full 40% IHT rate is payable 
• Three to four years, the IHT rate is 32%  
• Four to five years, 24% 
• Five to six years, 16% 
• Six to seven years, 8% IHT is due

The general inheritance tax nil rate band still applies, so lifetime gifts usually only increase the tax bill for the estate by reducing the amount of nil rate band available. . 

Moreover, some gifts are exempt regardless of when the donor dies:  

• Gifts up to £3,000 per donor every tax year 
• Gifts below £250 per recipient 
• Regular gifts made out of surplus income 
• Wedding gifts up to a set limit (£5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for any other recipient) 

Given that transfers between spouses are also exempt, and that the £3,000 allowance can be carried forward for one year, individuals can currently make quite significant gifts without the risk of a later inheritance tax charge. 

Discussion of potential changes to the rules on IHT and gifts tends to focus on two possibilities.  

First, the government could introduce a lifetime cap on the total amount of assets that can be passed on tax-free in a donor’s lifetime. It would also have to decide whether the resulting tax would then be paid during the donor’s lifetime, or would increase the IHT bill on death. 

Alternatively, it could remove the seven-year rule, so that all gifts made in a lifetime could be taken into account on death, not just those in the preceding seven years, or perhaps amend it – extending the period to escape IHT to ten years, for example. 

Either would represent a radical change in the tax treatment of gifts. In turn that could impact the pace of the “great wealth transfer”, which is predicted to be see £5.5 trillion to £7 trn of assets passing down the generations in the UK by 2050.  

The government has shown it is willing to make changes to inheritance tax, and economic forecasts indicate that it needs to significantly increase revenue if it is to meet its fiscal rules. At the same time, its previous promises may constrain which taxes the chancellor can raise. 

Although IHT raises relatively little (still less than one per cent of total tax revenue), it is not an unlikely target. 

Planning ahead is the key to managing inheritance tax, and it could be advisable to make planned transfers ahead of Budget day (likely to be in November). But donors should bear in mind the potential for capital gains tax exposures; gifting a property or shares, for instance, could trigger a CGT charge. If in doubt, take advice. 

Our team has a wealth of experience advising on inheritance tax, capital gains and all personal tax and succession issues. They’re happy to assist, so to talk through your options, please contact us today.