7 days ago
How Rachel Reeves could rake in billions from another inheritance tax grab
Britain's most hated tax could be turbo-charged as Rachel Reeves mulls a further death duty raid to plug a £50bn fiscal black hole.
The Chancellor has already announced that she will make private pension wealth subject to inheritance tax of 40pc and cut allowances for farmers and businesses.
Now the Treasury is considering a lifetime cap on the value of gifts that someone can pass on before they die in order to reduce their eventual inheritance tax bill.
The rate of taper relief – the tax discount you get for living at least three years after giving a gift – is also believed to be under review.
These aren't the only levers the Chancellor could pull. Here are all the ways Ms Reeves could squeeze more money out of taxpayers after they die.
Changing the seven-year rule
Current inheritance tax rules mean unlimited amounts of money and assets can be given as gifts to friends and relatives without paying any eventual inheritance tax, as long as the transfer happens at least seven years before the person giving the gift dies.
Official data shows that a rising number of people are being caught out by the seven-year rule and incurring a tax bill as a result.
The number of estates paying inheritance tax on gifts doubled from 590 in 2011-12 to 1,080 in 2021-22, the latest year for which data is available, according to HM Revenue & Customs (HMRC) figures. The amount of tax paid on these gifts rose from £101m to £221m over the same period.
Wealth managers have reported an increase in clients giving chunks of their wealth to family members amid fears the rule would be extended to 10 years or scrapped altogether in a renewed drive from the Chancellor to raise revenue.
Extending the seven-year rule would be one of the simplest ways for the Chancellor to target inheritances, according to Tom Selby of wealth management firm AJ Bell.
He said: 'If Rachel Reeves wants to target inheritances again, the simplest way to do this would be to either reduce inheritance tax thresholds or extend the 'seven-year rule' that applies to lifetime gifts.
'Given the freezing of inheritance tax thresholds will naturally raise more cash for the Exchequer over time through fiscal drag, a shift in gifting rules – for example, extending the period for lifetime gifts beyond which 0pc inheritance tax is due from seven years to 10 years – might be a viewed as a politically more palatable option.'
Extending the allowance freeze
Ms Reeves may also be tempted to raise revenue by extending the freeze to tax-free allowances.
The main inheritance tax exemption – the 'nil-rate band' – has been frozen at £325,000 since 2009.
This had been due to expire in April 2028, but Ms Reeves pushed the date back to April 2030 in her Budget last year. The allowance would have hit £555,000 by 2029-30 if it had risen with inflation.
The freeze has amounted to a stealth raid on inheritances, as rising asset prices mean more people being pushed past the tax-free threshold.
According to the Office for Budget Responsibility (OBR), changes to inheritance tax announced at the Budget last year – including bringing pensions into the inheritance tax net and extending the freeze on the nil-rate band for a further two years – will add £2.5bn to death duty receipts by 2029-30.
Tinkering with tapering relief
A so-called taper tax rate of between 8pc and 32pc is applied to gifts given between seven and three years before death. Money given less than three years before is taxed at the full inheritance tax rate of 40pc.
However, the Treasury is reportedly considering changing taper relief in order to raise revenue.
Sarah Coles, of investment platform Hargreaves Lansdown, said that Labour would introduce a 'cliff-edge' into the system if it chose to scrap taper relief altogether.
She added: 'This would mean a risk of a heftier tax bill on the estate, which would mean they have less to pass on to their family after their death.
'It would introduce a cliff-edge to the system, so that someone who made a gift in good faith and died one day short of seven years would be hit with a huge tax bill.'
Introducing a lifetime cap
The amount of money that can be given to friends and relatives as a gift that is potentially free from inheritance tax is currently unlimited.
But Ms Reeves is considering limiting the lifetime value of gifts that can be passed on before death.
Ian Dyall, of wealth manager Evelyn Partners, said this would be 'very controversial' given the most common form of gifting is between spouses.
He added: 'Many households could regard this as a rather intrusive tactic when they just want to pass on hard-earned wealth that has usually already been taxed in some form or other to one's own family.'
Analysis by financial advisors, Quilter, shows that retirees are giving around £2,500 to loved ones each year, mostly to help with the cost of living and education.
A cap low enough to target these families could disproportionately impact Britain's middle classes, according to Rachel Griffin, of Quilter.
She added: 'Introducing a lifetime cap would be a significant departure from current policy. The UK has never had such a limit, and if it were set too low it could affect a large number of middle-class estates, particularly in areas where property wealth alone can easily breach frozen thresholds.
'Tracking a lifetime cap could prove administratively complex, requiring HMRC to hold long-term records of gifts across decades and potentially leading to disputes where records are incomplete.
'There is also the risk of unintended behavioural shifts. A cap might encourage people to make large gifts earlier in life to use up their allowance, potentially moving significant assets out of their control before they are financially ready.'
