Inheritance Tax Overhaul

Anticipated inheritance tax changes by the Labour party have led to a surge in families distributing wealth. Chancellor Rachel Reeves’ mention of a £22bn funding deficit has sparked tax increase expectations.

Despite Labour ruling out hikes in National Insurance, income tax, and VAT, there’s speculation about increases in capital gains tax and adjustments to inheritance tax and pension tax relief. Over the past five years, baby boomers have transferred over £8bn to avoid inheritance tax, with family wealth transfers increasing by 40% from 2016-17 to 2020-21.

The rise in cash gifts corresponds with an increase in families affected by the contentious 40% charge. The inheritance tax exemption is limited to £325,000 per person or £1m for homeowners, thresholds that have remained static for years despite escalating house prices that expose more people to hefty bills.

The most straightforward method to reduce an inheritance tax bill is to distribute wealth during one’s lifetime. Caroline Foulger of TWM Solicitors noted a marked interest in gifting ahead of the general election due to apprehensions about a Labour-led overhaul. She stated, “Fears of a potential increase in inheritance tax under a Labour government have prompted some individuals to consider making substantial lump-sum gifts.”

Laura Hayward noted an increase in families gifting wealth due to potential inheritance tax changes and more estates being taxed. The current complex rules allow a £3,000 tax-free gift per year, with extra allowances in special cases. These rules may be reformed by the new government.

People with high liquidity can use the “unlimited gifting rule” for regular cash gifts from surplus income without affecting their lifestyle. These gifts, if given seven years before the giver’s death, are not part of the estate for inheritance tax.

The government may reduce the seven-year rule or cut gift reliefs to increase Treasury funds. Labour may raise capital gains or inheritance tax to fill a £22bn public finance gap. More clients are giving away money to avoid death duty, some exceeding their allowances hoping to outlive the seven-year rule.