Upcoming Budget may bring significant changes to inheritance tax (IHT) gift reliefs.
- Current rules allow unrestricted tax-free gifts from income, possibly targeted for reform.
- Proposed changes include limiting exemptions and increasing annual gifting allowance.
- Possible adjustment to the ‘7-year rule’ could extend tax applicability period.
- Impact of changes could affect wealth transfer strategies, especially for high-income earners.
The upcoming UK Budget is expected to bring substantial changes to inheritance tax (IHT) gift reliefs, a move signalling potential reforms aimed at the current system that allows various exemptions for gifting. Experts at NFU Mutual anticipate that these changes will primarily focus on gifts made from regular income, which are presently free from IHT if they do not alter the giver’s usual standard of living.
Sean McCann, a chartered financial planner at NFU Mutual, highlights that these gifts, currently without an upper limit, enable high-income individuals to transfer large sums free from IHT. “This approach has been widely utilised by wealthy individuals, particularly grandparents, to fund their grandchildren’s educational expenses,” he stated. The suggestion is that capping or abolishing this allowance, combined with potential VAT on educational fees, could considerably affect such financial strategies.
McCann also pointed to the complexity inherent in the present gifting exemptions, suggesting that the Chancellor might consider streamlining these into a single, more generous allowance. An example of this could be the removal of the allowances that permit £250 gifts to multiple recipients annually, along with exemptions on wedding gifts, in favour of boosting the annual gifting allowance from £3,000 to £15,000. However, this proposal raises questions about its generosity, given the fiscal need to enhance revenue alongside promoting wealth transfer during an individual’s life.
Another reform under consideration involves the ‘7-year rule’, where gifts become IHT-exempt if the donor survives for seven years post-gifting. Critics note the administrative burden of proving this timeframe, as obtaining seven years of bank statements can be burdensome for executors. A prior recommendation by the Office for Tax Simplification in 2019 suggested reducing this period to five years, yet there is speculation that it could be extended to ten years, potentially exacerbating these administrative challenges.
The potential overhaul of inheritance tax gift reliefs may pose significant implications for wealth distribution strategies, especially among affluent families.
