Recent media reports have suggested the government is considering capping lifetime gifts as part of the Autumn Budget. The move is being discussed as a way to increase inheritance tax (IHT) revenue and address the UK's budget deficit.
Currently, individuals can give unlimited gifts that fall outside of IHT if they survive for seven years after making them. A cap would be a significant change to the current regime and would align the UK with other countries that already impose lifetime limits.
Speaking to multiple media outlets, Private Client Partner Hilesh Chavda commented on the potential for the changes to curb asset transfers.
"Capping lifetime gifts could alter behaviour, potentially reducing overall tax revenue as individuals might retain assets in their estates, transferring them only upon death. This shift could significantly impact the economy and tax receipts. The effect of any cap on lifetime gifts largely depends on its design. A substantial cap, similar to the one in the US, might encourage long-term estate planning and facilitate the movement of assets."
Private Wealth Partner Hudda Morgan agreed and noted that this is not a new debate.
"For the whole of my career there has been talk of the Boomer bulge and inverted population pyramid, largely caused by significant increases in birth rates following WW2. This cohort are now reaching their 70s and 80s and, having benefited from strong and stable economic conditions and rising house prices, are now creating one of the largest and most widespread wealth transfers the world has ever experienced. This coincides with the need for the UK government to raise funds to both meet their commitment to cover spending from current revenue, alongside filling their inherited, estimated £20 billion shortfall. It comes as no surprise that the government are looking at the two circumstances together and seeing what opportunities there are to generate additional tax revenue.
"Capping lifetime gifts would be an option and is a route that other countries take. In the UK we have a rule where true gifts often fall out of the inheritance tax calculation totally, provided the donor survives by seven years. In other countries this seven-year rule doesn't apply. Instead, each person is given a total lifetime inheritance tax allowance, which can be used in lifetime or on death estate, but not both and there's no 'wiping the slate clean' after seven years.
"Changing the gifting rules will be criticised because it can have an adverse effect on business, deterring the passing of businesses through the generations. With assets like cash and chattels it can also be hard to police.
"Other options would be to look at reducing the seven year rule – it has previously been five years in the past, having exemptions to any anti-gift provisions for businesses or farms, enabling business owners to retire and businesses to be preserved and, if gifting is abolished, giving people a higher lifetime IHT allowance, so that only substantial gifting from the very wealthy would be caught."
The government is expected to confirm any changes in the Autumn Budget.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
