UK: Wealth managers fear for future of UK’s ‘generous’ inheritance tax loopholes

Wealth managers say their clients are increasingly worried the Treasury could crack down on the UK’s “generous” inheritance tax rules in an attempt to plug the country’s gaping fiscal hole.

Tax experts have flagged that the government could in the Autumn Budget look to cap the total amount that a person can “gift” over a lifetime without incurring inheritance tax, so long as they live for seven years after passing on the assets. This seven-year timeframe could also be extended, they have suggested.

Economists believe chancellor Rachel Reeves will need to raise billions in taxes in the Budget to meet her fiscal rules, something made more difficult by the government’s stance refusing to increase the rates of VAT, income tax or employees’ national insurance.

Treasury officials stressed on Wednesday that no decisions had been made for a Budget that was still several months away. Some tax experts have also warned that changing parts of the inheritance tax regime would be difficult to implement, politically unpopular and, crucially, might not raise much money.

Nevertheless, some of the country’s largest wealth managers including Evelyn Partners, Quilter Cheviot, RBC Wealth Management and Canaccord Wealth have reported a surge in enquiries in recent weeks from customers concerned that Reeves will raise taxes in her Budget.

At present, in the UK, anyone can give up to £3,000 free of inheritance tax (IHT) annually. Another option is the “potentially exempt transfer”, also known as the seven-year rule, in which any gift can be given free of IHT as long as the benefactor survives seven years. If the benefactor dies before the end of the seven-year period, “taper relief” will reduce the tax payable on gifts given between three and seven years before.

The chancellor last year cast the IHT net wider to include some farm and business owners from next spring, who will pay a 20 per cent levy above a £1mn threshold, and unused pension pots from April 2027, at 40 per cent.

Nimesh Shah, chief executive of tax adviser Blick Rothenberg, said that “the UK has a very generous gifting regime” and noted that it was “definitely an obvious target if you want to raise more money through inheritance tax, which this government clearly wants to”. 

The UK could impose a 10-year limit on gifting, or follow the US by capping the amount someone can gift in a lifetime, he said. The US limit is $13.99mn, a sum that appears large but “maybe isn’t a huge amount” because it includes gifts to children and school fees, he added.

Rachael Griffin, tax and financial planning expert at Quilter, said any changes to the lifetime cap would “capture not just large transfers designed to reduce tax bills but also modest, routine support between family members”.

Quilter’s research shows that UK retirees gift about £2,500 a year to loved ones, much of it to help with education and living costs.

“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,” Griffin added.

Chris Etherington, tax partner at RSM UK, suggested that options to expand IHT could include extending the seven-year period to potentially 10 to 14 years.

Some tax experts have cautioned against the view that the policy would give the immediate boost to the public coffers that the Treasury is seeking.

Emma Chamberlain, a barrister at Pump Court Tax Chambers, said extending the seven-year rule to 10 years “won’t raise much money quickly” for the government.

A lifetime cap would also be unlikely to raise money, as people would simply delay transferring assets above the cap in the hope that a different government would abolish the policy, she added.

Iain McLeod, head of private clients at St James’s Place, said people will have to engage in succession planning earlier on in life, especially “family businesses and owners of farming businesses where the premature death of an owner and a resulting IHT charge could trigger a crisis of liquidity”.

But gifting to the next generation was one method privately owned businesses were considering to avoid this new tax exposure.

Neil Davy, chief executive of Family Business UK, whose research covers more than 130,000 companies, said a lifetime limit on gifts would be “another hurdle” for his members and was “clearly unwelcome”.

“People could withhold capital investment, freeze hiring, consider redundancies, sell a part of the business to pay for it, or at the other extreme they could move overseas or sell up,” he added.

The Treasury said “the best way to strengthen public finances is by growing the economy”.

It added: “We are committed to keeping taxes for working people as low as possible, which is why at last Autumn’s Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of Income Tax, employee National Insurance, or VAT.”