Inheritance tax overhaul from Rachel Reeves could be 'worst of both worlds' for Britain
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More Britons could become liable for inheritance tax in the years to come under rumoured Government changes
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The UK is at risk of facing the "worst of both worlds" if rumoured inheritance tax changes from Labour ministers are introduced. It is understood the Government is examining potential changes to tax regulations as they seek solutions to a fiscal shortfall exceeding £40billion ahead of the autumn budget, according to Treasury insiders.
Government officials have reportedly been instructed to determine whether stricter regulations on monetary and asset transfers could generate additional revenue.
The proposals under consideration include implementing restrictions on the total value individuals can transfer during their lifetime and modifying existing taper relief arrangements.
Currently, transfers made more than seven years before death escape inheritance tax entirely, whilst those made between three and seven years face taxation on a graduated basis ranging from 32 per cent to eight per cent.
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Inheritance tax rules could be changed once again
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No final determinations have been reached, but the administration has notably avoided excluding potential tax increases this year.
James Ward, who leads the private client division at Kingsley Napley law firm, highlighted how younger people have become increasingly dependent on parental financial support amid elevated living expenses and property prices.
"If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes," Ward stated.
He warned that individuals possessing considerable assets might relocate overseas to avoid restrictions on transfers and the 40 per cent death duty.
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The Treasury is evaluating several specific measures, including establishing either annual limits on tax-free transfers or a cumulative lifetime threshold, according to government sources.
Officials are particularly focused on addressing concerns about substantial withdrawals from pension funds being transferred as gifts, especially given recent changes bringing unused pension assets within inheritance tax scope from April 2027.
Capital gains tax adjustments are also under review, with potential increases of several percentage points being explored alongside new allowances for investments in British enterprises.
A Treasury insider explained: "With so much wealth stored in assets like houses that have shot up in value, we have to find ways to better tap into the inheritances of those who can afford to contribute more."
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Ward expressed scepticism about the practicality of enforcing any cap system, suggesting it would create substantial administrative burdens for HMRC and generate extensive additional documentation requirements.
He predicted individuals might circumvent restrictions by providing loans rather than gifts, potentially reversing these arrangements if future Governments abandon the policies.
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"I can foresee that a number of people could find their way around this by gifting items or contributing to large expenditure and not reporting it. So query how effective any new rules will be," Ward commented.
Drawing comparisons with American taxation, Ward noted that whilst the US imposes gift taxes, it compensates with substantially higher estate duty exemptions. "The UK is in danger of having the worst of both worlds. Limited gifting and a low nil rate band threshold," he warned.
The Chancellor has indicated that existing wealth taxation mechanisms, including inheritance and capital gains taxes, serve as Britain's alternative to implementing a flat-rate wealth levy.
In an LBC interview on August 2, Reeves stated: "We have inheritance tax. We have capital gains. We've just got rid of the non-dom tax status that doesn't exist any more in our tax system. So we do have taxes that tax the wealthy."