Labour considers inheritance tax reforms with 'less generous' gifting allowances

Labour could bring in major changes to inheritance tax in the Autumn Statement. People planning for who they would like to pass on their estate to may want to bear in mind the tax, which is levied at a hefty 40 percent. The successor pays the tax on any total inherited assets above certain allowances.

One way you can reduce your liability is to give away tax-exempt gifts to your friends and loved ones, reducing the size of your estate. But you can only do this up to a certain amount. You can give away up to £3,000 each tax year divided between any number of people.

You can also separately give any number of gifts up to £250 to different people, as long as you haven't used any of your other gifting allowances, such as the £3,000 one, on the same person. But experts are warning Chancellor Rachel Reeves could make some of these allowances less generous in a bid to raise more revenues for the Treasury.

Andrew Byres, financial security and pension planning expert at life admin tool SafeKeep, said: "Inheritance tax remains one of the most politically sensitive, yet fiscally tempting, areas for reform. With thresholds frozen since 2009, more families have been drawn into inheritance tax thresholds as property values and pension pots have grown."

He said the lifetime gifting rules "could be made less generous, for example, by shortening exemptions or extending the seven-year window for larger gifts".

The seven-year rule allows you to make a larger gift to a person, above your annual allowances, but you have to survive for another seven years for the amount to be tax-free. The rate of tax you pay on the gift gradually reduces as you approach the seven-year mark.

Mr Byres pointed out some other aspects of inheritance tax that Labour could change: "The Government may look to tighten inheritance-based tax reliefs rather than overhaul the system outright. That could include reducing the £325,000 nil-rate band or the £175,000 residence nil-rate band, limiting business or agricultural property reliefs, or revisiting how pensions are treated within estates."

You can inherit up to £325,000 in total assets without paying inheritance tax, as well as an additional £175,000 worth when a main home is being passed on to a direct descendant. When a person dies, they can pass on any unused allowances to their spouse or civil partner, meaning their allowances can be effectively doubled when they die.

Aaron Peake, personal finance expert at free credit score service CredAbility, also believes there could be changes to inheritance tax. He said: "Inheritance tax could see changes, including a possible lifetime cap on tax-free gifts and adjustments to taper relief. While this mainly affects wealthier households, anyone planning their estate should consider the potential impact."

Laura Ripley, chartered financial planner at BRI Wealth Management, said that recent trends may motivate the Government to slash the gifting rules. She said: "Since the news that pensions will fall under inheritance tax from 2027, more families have been rushing to pass on wealth early.

"That could prompt the Treasury to rein in gift allowances - possibly merging all the current exemptions into one capped annual limit, or extending the seven-year rule for tax-free gifts." Labour announced in last year's Autumn Statement that inheritance tax would be expanded, including unused pension funds becoming liable for the tax from April 2027.

Chancellor Rachel Reeves will present her Autumn Statement to Parliament on Wednesday, November 26.