Raquel Reeves plans an inheritance tax increase targeted at Middle England to address a prominent deficit in public finances, drawing criticism from Conservatives who label Labour's approach as "envy politics".
The UK government is planning significant reforms to the Inheritance Tax (IHT) gifting rules, aiming to tighten exemptions and increase IHT revenues.
Current System: Seven-Year Survival Rule and Exemptions
Under the current system, a seven-year survival rule is in place. If the donor survives seven years after gifting an asset, it escapes IHT. Taper relief reduces the tax on a sliding scale if death occurs within seven years. Various exemptions exist for smaller gifts, gifts on marriage, and gifts to spouses or charities.
Proposed Changes: Extending the Survival Period, Lifetime Gift Cap, and Changes to Taper Relief
The Labour government, led by Chancellor Rachel Reeves, is considering reforms set to take effect from April 2026. These reforms may extend the seven-year rule to ten years, abolish it altogether, introduce a lifetime gift allowance/cap, and adjust how taper relief applies on gifts made less than the survival period.
These changes could broaden the tax net, with around 38,500 additional estates projected to be caught by the new rules. Middle-class families, who rely on lifetime gifting as a practical estate planning tool, may be particularly affected.
Context and Impact
Gifting is a common tool used by many households to reduce IHT liability. Proposed changes aim to generate approximately £50 billion in additional tax as part of broader fiscal policy efforts. The reforms may lead to significant reassessment of estate planning strategies, pushing people to reconsider timing and amounts of gifts, as well as possible relocation or restructuring options to mitigate tax exposure.
The Chancellor is considering tightening rules on gifting of money and assets before death to address the spending gap. The current IHT rate is 40% on the value of estates above £325,000.
In summary, the UK is moving from a relatively flexible seven-year exemption approach towards potentially tighter restrictions with longer periods, caps on tax-free gifts, and changes to reliefs that will broadly increase IHT liabilities for many, especially affecting those in the middle wealth brackets trying to engage in prudent lifetime gifting.
- Changes to the Inheritance Tax (IHT) gifting rules may lead to a significant reassessment of estate planning strategies for families, as they may need to reconsider the timing and amounts of gifts, or potentially explore options like relocation or restructuring to minimize tax exposure.
- The Labour government, with Chancellor Rachel Reeves at the helm, is considering reforms to the IHT system, including extending the seven-year survival rule to ten years, abolishing it, introducing a lifetime gift allowance/cap, and adjusting taper relief.
- In the context of broader fiscal policy efforts, these proposed changes aim to generate approximately £50 billion in additional tax, with around 38,500 additional estates projected to be caught by the new rules.
- The Chancellor is focusing on tightening rules on gifting of money and assets before death, in an effort to address the spending gap.
- Financial advice may become increasingly important for middle-class families as they navigate these changes, as the tactics they have relied on for estate planning, such as lifetime gifting, may become less effective under the proposed reforms.
