A “crackdown” on inheritance tax (IHT) relief could be introduced as part of Chancellor Rachel Reeves’s Autumn Budget on October 30, according to analysts.
Financial planners are sounding the alarm that a potential HM Revenue and Customs (HMRC) tax raid may be part of the fiscal statement.
Notably, some are suggesting popular IHT relief could be scrapped as Reeves attempts to plug the £22billion “black hole” in the public finances.
Inheritance tax is a levy on the estates of individuals who have passed away, which includes their money, possessions and property.
It is charged at 40 per cent on estates which are worth more than the £325,000 but there is relief Britons can take advantage of to reduce their liability.
Tax has to be paid when “gifting” if the a gift from an estate is made within seven years before the taxpayer’s death, depending on its value and who receives it.
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However, if gifts are made more than seven years after someone’s death, no tax is paid on the parts of the estate that have been gifted.
Any gifts given in the three years before their death are taxed at 40 per cent, which remains the current rate paid on inheritance tax.
Furthermore, gifts made within three to seven years before someone’s death are taxed on a sliding scale referred to as “taper relief”.
This is only applicable if the overall value of gifts handed over in the seven years before someone’s death is more than the tax-free threshold.
Here is a full breakdown of the IHT rates paid on gifts depending on when they are made:
- Three to four years: 32 per cent
- Four to five years: 24 percent
- Five to six years: 16 per cent
- Six to seven years: eight per cent
- Seven or more years: zero per cent.
The Chancellor will outline any changes to tax relief in the upcoming Autumn Budget
PA
Ian Dyall, the head of estate planning at Evelyn Partners, outlined what the impact of a IHT “crackdown” on households.
He explained: “One relatively easy way for the Government to make it more difficult for families to avoid paying IHT would be to tighten up the gifting rules – and specifically the seven-year rule which means that most gifts of any size leave the donor’s estate after this time period.
“The annual gifting limits – which allow smaller gifts that leave the estate immediately – are very modest, having been frozen for more than four decades, so there’s not much wriggle-room there.
“The Chancellor could however look at restricting the rules around “potentially exempt transfers”, which provide an incentive to give away wealth during lifetime. That’s not just because the assets will leave the estate altogether if the giver is still alive after seven years, but also because after two years there is a chance the gift(s) could be entitled to taper relief, where the IHT rate falls to as low as 8 per cent.
“The rule could be extended out to 10 or more years or even abolished, but this is unlikely to raise much for the Treasury in this Parliament unless it is applied retrospectively, which seems unlikely. Plus, it could jam up the transfer of wealth to younger adults who are more likely to spend it, restricting the flow of liquid funds back into the economy.”
