Millions will have to pay more in Rachel Reeves inheritance tax plan

Rachel Reeves is reportedly exploring measures to increase revenue from inheritance tax by tightening gift rules, a move that may disproportionately affect the middle class. The Guardian has reported the Treasury, ahead of the Autumn Budget, is considering tightening the rules surrounding the use of gifts of money to circumvent IHT.

Currently, cash gifts are exempt from tax as long as they are made more than seven years prior to the person’s death. Then, gifts made within three to seven years are taxed based on how close the recipient is to death. This move comes as Reeves is seeking to gather £50bn in new taxes before her next Budget to avoid breaking the government’s fiscal rules.

Gifting is a legitimate form of inheritance tax planning, not just for the super-rich, but also for middle-income taxpayers, explained a lawyer. Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, said: “Gifting assets is a legitimate and long-established way for middle-income households to reduce IHT, it’s not a complex tax scheme reserved for the super-rich.”

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According to HMRC inheritance tax data for 2020/21, families gave away over £2.1bn in cash gifts each year to reduce their IHT bills. However, the rumoured move may disproportionately affect middle-class families than ultra-high net worth individuals.

“This is because their wealth is often less diversified, thus presenting fewer options for how to make tax-efficient gifts from it,” Mitchell-Innes explained. He highlighted that people have expectations that they are free to give away their assets as they wish.

“The rumoured changes are causing people concern that their freedom to engage in prudent and sensible estate planning may be severely curtailed,” he added. If the rules are changed, middle-class families will be more exposed, “as many ultra-high-net-worth individuals are very mobile and can restructure or relocate to mitigate tax exposure, perhaps more easily than most middle-class families.”