“Rachel Reeves has already demonstrated in the October budget, with her attack on inheritance tax reliefs for farms and businesses, that increasing revenues from inheritance tax is within her sights. Changing the rules around gifting may well be next on her agenda.
“Gifting during one’s lifetime has for many years been a successful way of reducing inheritance tax on death. Provided the person making the gift survives for seven years after making the gift, the gift falls outside of their estate on death for inheritance tax purposes.
“All gifts become completely exempt if the person making the gift survives seven years from the date of the gift. If they fail to survive seven years and the amount gifted is £325,000 or less (their nil rate band), it is deemed to fall back into their estate for inheritance tax purposes. If they fail to survive seven years, only the amounts gifted in that seven-year period above their nil rate band of £325,000 will qualify for partial exemption.
“In my opinion, Rachel Reeves is likely to extend the seven years survival period required to 10 to 15 years, in the expectation that individuals tend to gift in their latter years to avoid paying inheritance tax and a greater number will fail to survive. It is not usual for clients to gift in their 50s and 60s; they tend to leave it until their 70s.
“She may also eliminate the partial exemptions of 20% of the inheritance due on the amount of a gift caught above £325,000, if the donor survives three years from the date of the gift. This goes up incrementally by 20% for each additional year survived and may affect end of life tax planning. Historically, if clients know they are likely to die within 3- 5 years, they will make substantial gifts to their children, sometimes in the millions, to take advantage of the partial exemption from inheritance tax on such gifts.
“In response to the costs of living pressures and to make more cash available in the pockets of the population to spend, Rachel Reeves may consider raising income tax thresholds, in the hope of boosting the economy.
“In support of small and medium sized businesses, the government may reduce the corporation tax thresholds and consider some type of relief from employers’ national insurance for small businesses. Currently, corporation tax on profits over £250,000 is taxed at 25%, with profits between £50,000 and £250,000 tapered from 19%. Rachel Reeves may consider increasing the 25% threshold to £300,000.
“Another option would be to align capital gains tax rates more closely with income tax rates, thereby affecting the tax due on the sale of investments and second properties This would discourage the ownership of second homes, increasing the available housing stock.”
If you need help understanding inheritance tax and planning the best way to protect your wealth for future generations, get in touch with our expert personal tax lawyers or call +44 (0)3333 231580
