With the Autumn Budget fast approaching, there is growing speculation that the UK Government may introduce further significant changes to Inheritance Tax (IHT), particularly around lifetime gifting. These changes could affect how individuals plan to pass on wealth during their lifetime and after death.
In this article, we outline the current rules, what may be changing, and what steps you can take now to prepare.
When Is Inheritance Tax Payable?
IHT is charged on the value of a person’s estate when they die, but only if it exceeds certain thresholds. The first £325,000 is covered by the Nil Rate Band (NRB). If the deceased leaves their home to direct descendants, an additional £175,000 may be available under the Residence Nil Rate Band (RNRB). Together, these allow individuals to pass on up to £500,000 tax free (or £1 million combined for couples who are married or in a civil partnership). Broadly speaking, IHT is then charged at the current rate of 40% on the excess, although there are several important exemptions and reliefs (for example, Agricultural Property Relief and Business Property Relief) that can reduce the tax bill, or even eliminate it altogether.
Lifetime gifting is one tool that can be used to reduce the value of an estate below the IHT threshold and, in turn, reduce the potential tax liability. However, it is important to remember that, although IHT is often seen as a “death tax”, many lifetime gifts are still subject to IHT unless specific conditions are met.
What Are Lifetime Gifts?
A lifetime gift is anything of value (such as money, property, or other assets) given away while you are alive. These gifts are commonly used to support children or grandchildren at key life stages, such as buying a first home, paying for education, or starting a business. As noted, they can also be used strategically to pass assets on to the next generation during your lifetime for IHT planning purposes.
It’s important to note that the value and timing of a gift may determine whether it is included in your estate for IHT purposes.
Current Rules for Lifetime Gifts
Under current legislation, some gifts are immediately exempt, while others may become exempt if the donor survives for seven years from the date of the gift. These are known as Potentially Exempt Transfers (PETs).
Key exemptions for tax free gifts include:
Annual Exemption: You can gift up to £3,000 in each tax year, with any unused allowance available to carry forward for one year.
Small Gift Exemption: Any gift of up to £250 by one individual to another is exempt from IHT, provided no other exemption is used for the same recipient and no more than £250 in total is given to the same individual in each tax year.
Wedding Gifts: Gifts of £1,000 to £5,000 are exempt, depending on your relationship to the recipient.
Seven Year Rule: Gifts made more than seven years before death are exempt from IHT.
Taper Relief: If death occurs between 3 and 7 years after the gift, the IHT rate is reduced on the value of any gifts over the IHT threshold on a sliding scale from 40% to as low as 8%.
There is currently no overall cap on how much you can give away during your lifetime, provided you survive the seven year period.
What Might Change in the 2025 Autumn Budget?
On top of the changes to IHT rules announced in the October 2024 Budget (mainly affecting agricultural and business property, as well as private pensions), the UK Government is reportedly considering further reforms to IHT in this year’s upcoming Budget. These could potentially include some or all of the following:
Lifetime Gift Cap: A limit on tax free lifetime gifts. If this is introduced, gifts above any set maximum level could be taxed at 40% at the time they are made, even if that is years before death.
Extension of Time for taxing PETs: The timescale for lifetime gifts “falling out” of your estate so that they are not counted for IHT on death could be increased beyond the current 7 years, catching gifts made longer ago.
Removal of the Seven Year Rule altogether: Gifts may be taxed regardless of when they were made.
Abolition of Taper Relief: Gifts made more than three years before death may no longer benefit from reduced tax rates.
Further Reform of Business and Agricultural Property Relief (BPR/APR): From 6 April 2026, relief on gifts of qualifying agricultural or business assets will be capped at £1 million per person. It is possible that lifetime gifts of qualifying assets made after the date of the Autumn 2025 Budget may be subject to further transitional rules.
If any of these changes are introduced, they could significantly impact estate planning and make it more difficult to pass on wealth in a tax efficient way.
What Should You Do Now?
While it is important to bear in mind that no further changes to the IHT rules have yet been confirmed, now is a sensible time to review your estate planning and your Will. Acting before the Autumn Budget could help you make the most of available tax reliefs and avoid being caught out by future restrictions.
Here are some practical steps to consider:
Use Existing Allowances: Make use of the £3,000 annual exemption and the £250 small gift allowance. These can help reduce the value of your estate without triggering IHT.
Consider Timing Larger Gifts: If you are planning to make substantial gifts, doing so before any new lifetime cap is introduced could be beneficial. Under current rules, there is no limit on the total value of gifts that can be made tax free, provided you survive seven years.
Document Gifts Carefully: Keep clear records of all gifts made, including the date, value, and recipient. This will help your executors and advisers assess any IHT liability and apply the correct exemptions or reliefs.
Monitor Budget Announcements: Stay informed about developments in the Autumn Budget. If changes are confirmed, you may need to act quickly to adjust your plans or take advantage of transitional rules.
Taking these steps now could help ensure your estate is protected and your wishes are carried out in the most tax efficient way possible.
If you have concerns about how the Budget might affect your IHT exposure, our specialist team at Eden Legal is here to help.
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Disclaimer: While every effort has been made to ensure the information in this article is accurate and current at the time of publication, it does not constitute legal or professional advice. Please be aware that circumstances may change over time.