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Newsletter issue – November 2024
Gifting rules look like they could be a target as one of several options to reform Inheritance Tax (IHT) and raise extra revenue for the Treasury.
As speculation builds around potential changes to IHT in the upcoming Budget, many tax commentators are expecting significant shifts in some key areas.
Gifting rules, particularly the "seven-year rule," which allows individuals to gift assets tax-free if they pass away 7 years or more after the gift is made, is reportedly one area that could be in the sights of the Chancellor. It means if the person dies within seven years of making the gift, the value of it may still be considered part of their estate for IHT purposes. As it currently stands, gifts made less than three years before death are taxed in full, while those given between three and seven years attract taper relief, reducing the IHT rate.
According to the i newspaper, the Chancellor may extend this period to ten years or even consider abolishing taper relief altogether. Another potential change could be the complete axing of the seven-year rule so that any gifts made during a person's lifetime would be subject to IHT upon death, regardless of how long they survive afterwards. Any changes along these lines could discourage lifetime gifting, reducing families' ability to pass on assets tax-efficiently, some have warned.
The nil-rate band, the amount of an estate that can be passed on without incurring IHT, could also be a target. This band has been frozen at £325,000 since 2009/10, despite significant property and investment inflation. Some experts argue that this freeze is dragging more estates into the IHT net. Receipts from IHT have already risen by 9% this year, with the Treasury collecting £3.5 billion between April and August and with another record total looking likely.
The Residence Nil-Rate Band (RNRB) is another relief under scrutiny. Introduced in 2017, this allowance enables an additional IHT exemption when a main residence is left to direct descendants. Think-tank The Resolution Foundation has urged the chancellor to abolish the £175,000 RNRB, saying it could save the Treasury around £2 billion.
Business relief, particularly for Aim shares, could also be subject of alterations. Currently, qualifying Aim shares held for two years can receive 100% IHT relief. Critics argue that this creates an unfair loophole for some investors.
Agricultural property is another area for possible tinkering. Currently, agricultural property used for farming can qualify for 100% IHT relief, allowing land and buildings to be passed on tax-free. However, this relief has come under increasing scrutiny, and commentators suggest it may be reviewed to ensure it aligns with broader IHT reforms.
Could we also see tiered IHT rates based on estate size or the capping of reliefs? There is certainly a lot of scope for adjusting the rules around IHT and it will be fascinating to see which of these many potential options, if any, become reality on 30 October.
