How does Rest Less make money
We make money through advertising and commission from affiliate links, which enable us to offer Rest Less as a free service to our users. The content on this page may use affiliate links, which track traffic from our website to a third party provider and enable us to receive a commission or payment from any traffic we refer.
* Affiliate links on this page have an * next to them. We place enormous importance on our editorial independence and the integrity of our content which means that we will never change how we write about something as a result of an affiliate link.
The government is reportedly weighing up major changes to Inheritance Tax (IHT) as it searches for ways to plug a budget shortfall of more than £40 billion.
Proposals under consideration could see the rules on gifting tightened, potentially increasing the amount of tax paid on wealth passed between generations.
The amount raised from Inheritance Tax (IHT) hit a record £8.2 billion in the 2024/25 tax year, driven higher by soaring property prices in many parts of the UK, combined with frozen tax thresholds. Now, the government is supposedly thinking about introducing a lifetime cap on the amount people can pass on to loved ones before they die. Another proposal thought to be under discussion is reforming – or even removing – taper relief on gifts.
Here, we look at how current Inheritance Tax rules and what steps you might be able to take to minimise any potential liability ahead of any possible changes.
It’s worth noting that the Chancellor has already announced significant changes to inheritance tax that could fundamentally change the way families use pensions in their financial planning. Historically, pensions have been a vital tool used by some people to preserve wealth across generations, but from April 2027, pension assets will fall into the inheritance tax net for the first time. You can read more about these changes in our guide Budget 2024 pension changes.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
How does Inheritance Tax work?
Inheritance Tax is charged at a rate of 40% on the value of your assets above a £325,000 threshold when you die. It can also apply to some specific gifts and transfers made during your lifetime.
If you’re married, or have a civil partner, you can leave your entire estate to your spouse or partner free of inheritance tax. Transfers between spouses do not use up any of your nil rate band and in fact, your unused nil rate band can be transferred to your spouse or civil partner.
There’s a further allowance, known as the main residence allowance, that applies in addition to the existing nil rate band, but only where the person who has died is transferring a property that was once their home, to their direct descendants (for example, their children or grandchildren). The main residence nil-rate band is currently £175,000. Learn more about how Inheritance Tax works in our guide What is Inheritance Tax?
The good news is that there are several allowances that can help you minimise any potential tax liability. You can read about these in our article Six ways to reduce inheritance tax bills.
For example, under current rules, if a parent gives money to their children and survives seven years the gift becomes known as a ‘potentially exempt transfer’ and is not subject to any inheritance tax. Read more in our guide Inheritance Tax: what are potentially exempt transfers?
If a gift is given within the seven years before someone died and it exceeds their nil rate band, then it is classed as a chargeable potentially exempt transfer and Inheritance Tax will need to be paid, with the amount charged tapering as time goes by.
What impact would a cap on gifts have?
A cap on gifts could be implemented in two main ways, according to experts. It could potentially take the form of a yearly cap, for example, an amount can be gifted per year before gifting tax is charged, or a lifetime cap, so a set amount that can be gifted over a person’s lifetime.
Ingrid McCleave, partner at city law firm DMH Stallard and tax specialist, said: “If Rachel Reeves proceeds with a tax on gifts, these gifts of deposits may become subject to inheritance tax in the future. Not only are parents that work hard and save having to pay income tax on their salaries and savings, they may after the next budget suffer an additional tax on death, on amounts they have not had the benefit of for possibly years.”
Experts claim that a lifetime cap on gifts could have long-term negative consequences.
James Ward, Head of the Private Client Practice at law firm Kingsley Napley, said: “In my experience, the younger generation have come to rely on the bank of Mum and Dad heavily and with the costs of living and housing at a record high, this reliance is increasing. If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes.
“It will also be very difficult to police a cap concept and will create a challenge for HMRC and a substantial amount of extra paperwork. I can foresee that a number of people could find their way around this by gifting items or contributing to large expenditures and not reporting it. So query how effective any new rules will be. Also individuals could simply lend the money now and wait until Labour is voted out and the rules are reversed then turn the sums into gifts.”
There is also speculation that the government might make changes to taper relief, which applies if you give away more than your nil rate bands before you die, and the rate of tax you pay gradually drops between three and seven years after the gift is given. It is possible that taper relief could be scrapped, which would mean that Inheritance Tax would be payable at 40% on gifts unless you live for seven years after making them.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This would mean a risk of a heftier tax bill on the estate, which would mean they have less to pass onto their family after their death. It would introduce a cliff edge to the system, so that someone who made a gift in good faith and died one day short of seven years would be hit with a huge tax bill.”
What can I do ahead of any possible changes?
It’s worth remembering that no changes have actually been announced yet, so although it’s worth considering your position, making any panic decisions is likely to be unwise. If you’re uncertain whether you’re likely to leave a big tax bill and are looking for ways to minimise any potential liability, it’s usually a good idea to seek professional financial advice.
Ms Coles said: “Questions around the future of inheritance tax could encourage people to consider giving gifts during their lifetime while they know where they stand. In addition to potentially exempt transfers, you can give up to £3,000 away each year, which will fall within your annual gift allowance. There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.”
Before making gifts, it’s vital not to check you’re not giving money away that you can’t afford to part with. “As you get older, your spending needs are likely to change, and some people will need to pay for care, which can have a profound impact on their finances,” said Ms Coles. “If you’re not sure what you can afford to give away, it can make a lot of sense to speak to a financial adviser who can model your spending needs and help you avoid handing over too much too soon, and facing horrible challenges as you get older.”
Even if no changes to inheritance tax are announced in this year’s Autumn Budget, it may still be a good idea to seek financial advice if you’re likely to be affected by the changes to pensions and inheritance tax which are due to come into effect in 2027.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
* Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.
Request a FREE Choice Funeral Plan Brochure
A Choice Funeral Plan lets you pay towards your funeral and record your wishes in advance, helping to give you and your family peace of mind.
Request your brochure using the link below or speak with one of our experienced team members at Choice on 0808 258 4867.
Terms, conditions, limitations and exclusions apply.
Join the discussion
Read our full commenting terms and guidelines