Introducing a lifetime cap on the value of gifts a person can make before death without incurring inheritance tax risks stifling intergenerational support, industry experts have warned.
Reports have suggested that the Chancellor is eyeing up a cap on lifetime gifting amid growing pressure on the country’s finances.
According to the reports, officials have been tasked with examining whether tightening rules on the gifting of money could potentially help the Government plug the £51 billion black hole in public finances.
As it stands, individuals can give as many gifts of any size as they want during their lifetime. If it exceeds annual allowances, it becomes a potentially exempt transfer and will fall out of the estate completely for inheritance tax purposes after seven years.
For those who die within seven years, there are specific rules. If someone makes gifts of less than the nil rate band of £325,000 and dies within seven years, they’re counted as part of their estate, so will use up the first portion of their nil rate band.
If someone has given away more than £325,000 in the seven years before they die, benefactors will need to add up what was given away. When it breaches £325,000, any gifts over that will have inheritance tax to pay on them – and it has to be paid by whoever got the gift.
Taper relief can apply, so the longer it has been since the gift, the more the tax rate shrinks. If it was given within the previous three years, the full 40% IHT will need to be paid; if they gave it between six and seven years ago, the rate is reduced to 8%.
However, placing a cap on gifting would bring more gifts into scope for inheritance tax and capture not just large transfers designed to reduce tax bills but modest, routine support between family members, industry experts say.
Rachael Griffin, tax and financial planning expert at Quilter, said: “More people are already being drawn into the IHT net due to frozen thresholds, rising property values and, from 2027, unused pensions being brought into scope.
“Introducing a lifetime cap would be a significant departure from current policy. The UK has never had such a limit, and if it were set too low it could affect a large number of middle-class estates, particularly in areas where property wealth alone can easily breach frozen thresholds.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It’s hardly surprising that inheritance tax is back in the frame, because it meets the Government’s criteria of raising tax without taxing people more during their working lives. The system is so fiendishly complex that there are an enormous number of rules, and therefore tweaks, that the Government could consider.
“However, from a Treasury perspective, it would need to be balanced against the fact that, at the moment, these gifts allow for money to pass through the generations. It means younger family members can put it to work for them, buying homes and spending.
“These things bring in taxes, from stamp duty to VAT. They also feed more money into the economy and boost economic activity. There is a risk that a change in the rules would stymie this flow of cash, which could have an impact on growth.”
Griffin warned that a change in policy could also cause unintended behavioural shifts, encouraging people to make large gifts earlier in life to use up their allowance. Others may also explore more structured planning options such as trusts, which can offer greater flexibility and control over how assets are managed and distributed.
According to Griffin, if a lifetime cap is introduced, it must be designed in a way that recognises the positive role intergenerational transfers play in supporting younger generations.
“Without careful thresholds and exemptions, a cap risks discouraging these transfers, limiting the flow of wealth through the economy, and unfairly penalising families who make regular small gifts over many years.
“Any review of gifting rules should be considered alongside the outdated gifting allowances, which have been frozen for over 40 years. Reform should be proportionate and targeted at genuine avoidance, while ensuring families can continue to provide support without fear that normal acts of generosity will be swept into the IHT net,” she added.
Main image: markus-spiske-dMh1A35w_BE-unsplash
