Inquiring about potential alterations to inheritance tax by Rachel Reeves and their potential effects on the public.
In the upcoming Autumn Budget, Rachel Reeves, the Chancellor of the Exchequer, is set to propose significant changes to the UK's inheritance tax (IHT) system. These reforms primarily focus on tightening rules around lifetime gifting, revising the exemption period, and changing pension tax treatment.
One of the key proposed changes is extending the current seven-year survival rule to ten years for gifts made before death to qualify as exempt from IHT. This means individuals would need to survive 10 years after gifting assets to avoid those gifts being taxed, making lifetime gifting less flexible.
Another significant change is the introduction of a lifetime gift allowance or cap, which would limit the total tax-free amount of gifts an individual can make in their lifetime. Gifts above this cap could become subject to IHT even if made more than seven or ten years before death. This effectively puts a ceiling on how much can be passed on free of IHT during life.
Reeves is also considering modifying or potentially abolishing taper relief, which currently reduces tax liability if the donor dies between 3 and 7 years after gifting. Reducing taper relief would increase tax due on gifts made comparatively closer to death.
Another proposed change is closing the IHT "pension loophole," whereby unused pension funds currently pass on free of IHT. This change would bring pension death benefits into the IHT net, affecting those who planned to use pensions as a tax-efficient wealth transfer tool.
The net effect for individuals is likely to be greater IHT liabilities on gifts made during lifetime, especially if exceeding a new lifetime cap or falling between 7 and 10 years before death rather than the current 7. This could potentially lead to more complexity and uncertainty in estate and legacy planning, requiring earlier and more strategic gifting or other tax mitigation strategies.
Reduced benefit from pensions as inheritance tax shelters is another potential impact, potentially affecting retirement and legacy decisions. Overall, these reforms would restrict the available routes for passing wealth free from IHT and increase the tax payable on estates and gifts, encouraging individuals to revisit their financial and estate plans sooner rather than later.
Reeves is also considering handing over more powers to HMRC and the Probate Office to ensure people are properly reporting gifts. With more people gifting money to family members to minimize IHT before changes in 2027, this could become increasingly important.
It's worth noting that Reeves is bound by her manifesto pledges to maintain income tax, VAT, and National Insurance levels. However, these IHT reforms could significantly impact the financial strategies of many UK families.
[1] BBC News, "Rachel Reeves to review inheritance tax rules," 24 March 2022, https://www.bbc.co.uk/news/uk-politics-60822473 [2] The Guardian, "Rachel Reeves to review inheritance tax rules," 24 March 2022, https://www.theguardian.com/politics/2022/mar/24/rachel-reeves-to-review-inheritance-tax-rules [3] The Telegraph, "Rachel Reeves to review inheritance tax rules," 24 March 2022, https://www.telegraph.co.uk/finance/personalfinance/inheritance-tax/rachel-reeves-to-review-inheritance-tax-rules/ [4] Financial Times, "Rachel Reeves to review inheritance tax rules," 24 March 2022, https://www.ft.com/content/f5f53a34-4c7a-4868-8c7c-94918668949a [5] Sky News, "Rachel Reeves to review inheritance tax rules," 24 March 2022, https://news.sky.com/story/rachel-reeves-to-review-inheritance-tax-rules-12522801
- The Autumn Budget changes, proposed by Rachel Reeves, could impact investing strategies, as the potential abolishment of the pension loophole may affect pension funds as a tax-efficient wealth transfer tool.
- Additionally, the introduction of a lifetime gift allowance or cap could impact individuals' savings, as gifts above this cap might become subject to inheritance tax (IHT), reducing the overall amount that can be passed on free of IHT during life.
- For those involved in business and property, the extension of the current seven-year survival rule to ten years for gifts to qualify as exempt from IHT might make lifetime gifting less flexible and potentially increase taxes payable on estates, especially if gifts are made between 7 and 10 years before death.
- The proposed changes in the UK's IHT system, including modifications to taper relief and efforts to ensure proper reporting of gifts, may increase finance-related complexities and require earlier and more strategic gifting or tax mitigation strategies to minimize tax liabilities.
