Experts at financial advice firm, NFU Mutual, suggest inheritance tax (IHT) reliefs on gifts could be a key target in the forthcoming Budget.
Currently there are multiple gift exemptions, many of which people are unaware of and others where the rules are poorly understood.
Sean McCann, chartered financial planner at NFU Mutual, believes there could be three significant changes on the cards in relation to tax exemption on gifts, with the most likely being a reform to regular gifts out of normal expenditure.
He explains: “Currently, if you make regular gifts there’s no restriction on how much you can give away immediately free from IHT, provided it is out of your income and doesn’t impact your normal standard of living.
“This is likely to be in the Chancellor’s sights in the forthcoming Budget. With no upper limit, it currently allows those with high incomes to give away significant sums immediately free from IHT.”
DOUBLE BLOW
And he adds: “Many wealthy grandparents use this to pay their grandchildren’s school fees and so the introduction of a limit or an abolishment, coupled with VAT on school fees, would be a double blow.
“Secondly, there are multiple other gifting allowances* that allow you to give cash away immediately free from inheritance tax, the Chancellor may look to abolish these in favour of one single gifting allowance as a simplification measure.
“An obvious way to do this would be to abolish the allowances that allow you to give away £250 each tax year to as many different people as you wish, the exemption on wedding gifts of up to £5,000 to children, £2,5000 to grandchildren or £1,000 to anyone else, in favour of increasing the £3,000 annual gifting allowance to £15,000.”
ECONOMIC ADVANTAGES
“Given the need to deliver increased revenue, how generous the Chancellor might be with the annual gifting allowance remains to be seen. But this does need to be balanced with the wider economic advantages that come with encouraging people to pass wealth down the generations during their lifetime.
“Finally, we wouldn’t be surprised to see a change to the ‘7-year rule’. Right now, most other gifts given during your lifetime are free from IHT if you live for seven years, often executors can experience difficulties in tracing gifts due to the difficulties in obtaining bank statements that go back seven years.
“In 2019, the Office for Tax Simplification recommended reducing the seven-year period to five years. However, there has been speculation that the Chancellor could go the other way and increase it to 10 years, which would only serve to compound the administrative problems many executors face.”
