Chancellor Rachel Reeves is under pressure to address budget deficit but mooted reforms could be 'straw that breaks the camel's back', warns broker
Mortgage experts have reacted with horror at the prospect of an increase in inheritance tax.
Rachel Reeves, the Chancellor, is reportedly considering a new round of reforms as the government seeks to plug a £50 billion hole in its budget amid persistent economic headwinds. The Treasury is said to be weighing the abolition of the long-standing “seven-year rule” on gifts, alongside a potential lifetime cap on the value of assets that can be transferred tax-free.
Such a move would not only risk curbing transactions and dampening housing market sentiment, but could also complicate the wealth transfer strategies that underpin a sizeable share of property purchases.
READ MORE: Families urged to take advice on inheritance tax
The debate around inheritance tax reforms comes against a backdrop of sluggish growth, stubborn inflation, and rising unemployment. The National Institute of Economic and Social Research has called for credible fiscal solutions ahead of the Autumn Budget, while HMRC has already received a record £6.7 billion in inheritance tax receipts for the previous tax year.
Anthony Emmerson, of Trinity Financial, told Mortgage Introducer the changes being discussed are “shocking, to say the least”.
He said: “People have worked hard to earn this money and have paid their taxes on the income generated to allow for these savings to build up over time. To then have that carpet pulled out from under them now will set a poor example to the younger generation, whom the government should be encouraging to work and save into pensions in order to put less reliance on the state in the future. The government policy is severely short-sighted and narrow-minded.”
Currently, inheritance tax is levied at 40 per cent on estates exceeding £325,000, with gifts made more than seven years before death exempt from the charge. The mooted reforms would mark a significant tightening of the rules, potentially eliminating one of the last remaining avenues for families to pass wealth between generations without incurring a substantial tax liability.
As reported by The Independent, Sir Mel Stride, the Shadow Chancellor, accused the government of “coming for your family’s future to fund their failure”, adding: “Those who have worked hard, saved and want to pass something on to their loved ones shouldn’t be punished by yet more taxes from Labour.”
The changes under consideration would also build on recent moves to extend inheritance tax to pension pots and to impose a 20 per cent rate on family businesses and farms valued above £1 million. Add in last year’s plans, announced by the Conservative Party and reinforced by the new Labour government, to abolish non-dom status – which means a person pays UK tax only on money they earn in the UK – and the fear is that an inheritance tax hike will drive wealthy people out of the country.
Rob May, an inheritance tax insurance adviser with SPF, told Mortgage Introducer the latest idea may be a step too far. “If the government goes further, it’s arguably the straw that breaks the camel’s back,” he said. “It could lead to an even greater exodus of people from the UK, particularly business owners, and that’s quite a real possibility.”
He added that any extension to the “seven-year rule” or to the amount you can gift within your lifetime without being hit with tax liabilities will be unwelcome. “It just really shuts down all possible avenues from an inheritance tax planning perspective, which is just incredibly unhelpful off the back of all those other changes that are on the horizon.”
