Rachel Reeves is reportedly considering implementing new changes to Inheritance Tax, with a potential restriction 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%.
The Treasury is contemplating a cap on lifetime gifting to address a significant deficit in public finances exceeding £40 billion. This proposal coincides with the announcement of a new Winter Fuel Payment deadline by the Department for Work and Pensions.
The proposed cap would limit the amount individuals can gift, while potential modifications to the taper relief for lifetime gifting are also being explored. The Treasury emphasized its focus on economic growth as the primary strategy to strengthen public finances, citing planning reforms expected to boost the economy by £6.8 billion and reduce borrowing by £3.4 billion.
Despite exemptions in place, the vast majority of families do not pay Inheritance Tax upon a loved one’s passing. However, forthcoming changes include pensions becoming subject to Inheritance Tax. Inheritance Tax applies to the estate of a deceased person, encompassing property, possessions, and money, with taxation triggered within seven years of death for estates exceeding £325,000.
Various exemptions can impact the Inheritance Tax threshold, such as leaving an estate to a spouse or civil partner, which can increase the threshold to £500,000. Unused allowances can be transferred between spouses or civil partners, potentially allowing a couple to pass on up to £1 million tax-free. Inheritance Tax is levied at a standard rate of 40% on taxable estates.
Opportunities exist to reduce Inheritance Tax liability, such as a reduced tax rate of 36% on assets bequeathed to charity. Inheritance Tax may apply to inherited pensions from April 2027, affecting pensions inherited from individuals who passed away after the age of 75.
Inherited pensions will become subject to Inheritance Tax from 2027, while death in service payments will remain exempt. The evolving landscape of Inheritance Tax regulations underscores the importance of staying informed about potential changes impacting estate planning and wealth transfer.
