Faced with  slowing economic growth, higher-than-hoped inflation and unemployment at a four-year high, Chancellor Rachel Reeves is looking for ways to plug the £40bn ‘black hole’ in the economy without reneging on Labour’s election promise not to increase income tax, national insurance or VAT

With public finances looking increasingly grim, The Treasury is looking at ways to raise more money from inheritance tax ahead of the autumn budget.

Officials have been tasked with examining whether tightening rules on the gifting of money and assets could be one way of addressing a gap between revenue and spending estimated to eclipse the £22bn inherited from the Tories that was quoted ad nauseam as Labour got its feet under the desk.

Although no decisions have been taken, the government has been careful not to rule out tax rises later this year, and Rachel Reeves and Keir Starmer have already prepared the ground for tax rises in recent interviews, suggesting that the pressure on public finances is too great to rule them out.

Here some lawyers respond:

 

Hilesh Chavda, partner at law firm Spencer West LLP, says:

“Capping lifetime gifts could alter behaviour, potentially reducing overall tax revenue as individuals might retain assets in their estates, transferring them only upon death. This shift could significantly impact the economy and tax receipts. The effect of any cap on lifetime gifts largely depends on its design. A substantial cap, similar to the one in the US, might encourage long-term estate planning and facilitate the movement of assets.”

Hudda Morgan, partner at Spencer West LLP, adds:

“For the whole of my career there has been talk of the boomer bulge and inverted population pyramid, largely caused by significant increases in birth rates following WW2. This cohort are now reaching their 70’s and 80’s and having benefited from strong and stable economic conditions and rising house prices are now creating one of the largest and most widespread wealth transfers the world has ever experienced. This coincides with the need for the UK government to raise funds to both meet their commitment to cover spending from current revenue, alongside filling their inherited, estimated £20 billion shortfall. It comes as to surprise that the government are looking at the two circumstances together and seeing what opportunities there are to generate additional tax revenue.

“Capping lifetime gifts would be an option and is a route that other countries take. In the Uk we have a rule where true gifts often fall out of the inheritance tax calculation totally, provided the donor survives by seven years. In other countries this seven-year rule doesn’t apply. Instead, each person is given a total lifetime inheritance tax allowance, which can be used in lifetime or on death estate, but not both and there’s no “wiping the slate clean” after seven years.

“Changing the gifting rules will be criticised because it can have an adverse effect on business, deterring the passing of businesses through the generations. With assets like cash and chattels it can also be hard to police.

“Other options would be to look at reducing the seven year rule – it has previously been five years in the past, having exemptions to any anti-gift provisions for businesses or farms, enabling business owners to retire and businesses to be preserved, and if gifting is abolished, giving people a higher lifetime IHT allowance, so that only substantial gifting from the very wealthy would be caught. “



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