With the 2025 Autumn Budget now just around the corner, all eyes are on what the Chancellor might do when it comes to Inheritance Tax.
With the Government’s promise not to raise taxes for “working people”, further changes are a distinct possibility. The "Great Wealth Transfer", by which it is estimated that between £5 Trillion to £7 Trillion will pass down from the Baby Boomer generation over the next 30 years, could be seen as a tempting source of revenue.
In the October 2024 budget, restrictions were announced on reliefs for Business Owners and Farmers which are due to come into effect in April 2026. See our articles:
Family business owners take action as we go into 2025 | Weightmans
UK Farmers Face a £300,000 Inheritance Tax Shock | Weightmans
In addition, inheritance tax allowances were frozen and, dramatically, pension funds were announced to being brought into the inheritance tax net from April 2027 Inheritance Tax post Autumn 2024 Budget | Weightmans
So what comes next?
It is just speculation of course, so difficult to plan for, and impossible to advice on, but perhaps there could be changes in the lifetime giving rules.
Potentially Exempt Transfers (PETS)
Making a gift (of an unlimited amount) to individuals outright and then surviving that gift for a period of time has been a mainstay in inheritance tax planning for years. It is straightforward and well understood. So long as you cannot benefit from the gift yourself, then after the 7 years, the value given away falls off the Inheritance tax ‘clock’ and is completely exempt.
The Government may decide that the PET regime is too generous.
The amount could be capped at a certain amount per year (the Office for Tax Simplification suggested a cap of £25,000 as long ago as 2019) or/and there could be an increase in the time period to, say, 10 years, both measures which could encourage earlier gifting.
Annual allowances
The £3,000 annual gift allowance was set back in 1981 and has remained unchanged for over 40 years. As a consequence, its effect and value are mostly insignificant.
Giving away surplus income regularly is also completely exempt – no need to survive 7 years. As this exemption is uncapped, potentially significant sums can be transferred. The only limit is that the amount gifted must not exceed your true surplus income after covering your living expenses, and there must be an established pattern of gifting. This makes it potentially extremely useful and has been used by those who can afford it to help family members with house deposits or school fees. It is an allowance, though, which entails significant record keeping and is administratively heavy to police.
With the death benefits of pensions becoming taxable, surplus income giving could been seen by some as a way to counter the Government’s measures. Drawing an income from pension funds could increase surplus income allowing for more exempt gifts to made family members or to provide funds to pay a life policy to cover the increased tax bill.
Restricting this relief could be seen as a way of making the tax system more straightforward.
The Residential Nil Rate Band Allowance
There is an extra allowance on death if a person leaves his/her house to children or grandchildren and the estate is less than £2million in total. This allowance is worth up to £175,000 but it is notoriously complex to deal with, particularly when "downsizing" has to be taken into account. It was a relief that was introduced as a result of political expediency when a promised increase in the main £325,000 allowances became too difficult/expensive. It is arguably arbitrary and could be a target for change.
Whilst knee jerk decisions based on what could happen is not to be recommended, those contemplating making gifts anyway in the short term may want to consider whether it would be worth finalising arrangements before "Budget Day" on 26th November 2025.
If you would like to know more about pre-budget estate planning, please contact our expert inheritance tax advisors.
