The Treasury is reportedly considering a lifetime cap on the value of gifts a person can make before death without incurring inheritance tax (IHT)
The government is thought to be exploring the possibility of limiting the total value of one-off gifts under the ‘potentially exempt transfer’ rules.
It is also rumored to be looking at adjustments to the rate at which inheritance tax liability tapers in the seven years between a gift and death.
Currently if a parent survives seven years the gift is not subject to IHT.
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James Quarmby, partner in private wealth and leading tax lawyer at Stephenson Harwood, said: “If the chancellor starts taxing lifetime gifts it has the potential to completely blow up in her face and wreck any chances of a re-election.
“Potentially Exempt Transfers are the reason only 4% of estates pay inheritance tax, yet nearly 30% of people believe they will, which makes it a deeply sensitive issue for the middle classes, who are becoming increasingly squeezed.
“Remove that relief and you don’t just raise tax, you ignite a political firestorm. The Labour Party is already seen as high tax and high spend, but start targeting middle class assets and it will end in grief.”
Rachael Griffin, tax and financial planning expert at Quilter, said the firm’s research shows UK retirees gift around £2,500 a year to loved ones, much of it to help with education and living costs.
“Introducing a lifetime cap would be a significant departure from current policy,” she said.
“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.
“Tracking a lifetime cap could prove administratively complex, requiring HMRC to hold long-term records of gifts across decades and potentially leading to disputes where records are incomplete.”
She added that there is also the risk of unintended behavioural shifts as a cap might encourage people to make large gifts earlier in life to use up their allowance, potentially moving assets out of their control before they are financially ready.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It’s hardly surprising 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.”
Stephen Atkinson, global head of sales at Utmost Wealth Solutions, said: “Ultimately, while the chancellor is clearly keen to explore all available revenue-raising options, these reforms and continued uncertainty over the future direction of travel are making the UK increasingly less attractive from a wealth perspective.
“We have seen many high-net-worths and non-doms leave the UK in the last year and any further measures that make the UK less competitive as a destination for affluent families would likely accelerate this impact.”
