Rachel Reeves has been accused of “coming for your family’s future” with a possible inheritance tax raid – but a former Treasury adviser has warned the changes still won’t be enough to fill the £50bn black hole.
Officials are thought to be looking at scrapping the ‘seven-year rule’ – which means that no tax is due on any gifts you give if you live for seven years after giving them – to help address the UK’s multi-billion-pound shortfall left by Labour U-turns, higher borrowing and sluggish economic growth.
It comes just days after the National Institute of Economic and Social Research (Niesr) piled pressure on the chancellor to come up with solutions ahead of her budget in the autumn.
But Jonathan Portes, a former Treasury adviser and professor of economics and public policy at King’s College London who supports the idea of inheritance tax reform, told The Independent such changes would “certainly not raise tens of billions of pounds, or anything like it”.
Tory shadow chancellor Sir Mel Stride accused Labour of punishing working families to “fund their failure”, while leading analysts at Hargreaves Lansdown warned Labour may “come to regret” making detailed changes to inheritance tax as it could hamper efforts to boost economic growth.
Inheritance tax is paid when a person’s estate is worth more than £325,000 when they die and is seen by many as a form of wealth tax in all but name.
Under current UK rules, gifts made more than seven years before a person’s death are exempt from inheritance tax.
Money given less than three years before is taxed at the full inheritance tax rate of 40 per cent, while gifts given between seven and three years have a “taper relief” tax, between eight and 32 per cent.
While it is understood that no decisions have yet been taken, among the reported measures under consideration is a potential lifetime cap on gifts to limit the amount of money people can donate outside of inheritance tax, as well as reviewing rules around the taper rate, sources told The Guardian,
Responding to the reports, Mr Portes said: “Inheritance tax certainly needs reform – it is too easy for very rich people with good tax advice to avoid, and it is welcome HMT [HM Treasury] is looking at this.”
“More broadly, we need to tax relatively well-off older people more – whether during their lifetimes and on death. However, IHT reform will certainly not raise tens of billions or anything like it.”
Hitting out at the prospective measures, Sir Mel said Labour is “coming for your family’s future to fund their failure”.
“Those who’ve worked hard, saved responsibly and hope to leave something behind shouldn’t be punished to pay for Labour’s economic black hole”, he added.
Tax experts have also raised alarm over the possible changes. With the government planning to levy inheritance tax on pensions from April 2027, Scott Gallacher, of wealth management firm Rowley Turton, warned that families with two children and an estate over £1m could be leaving more money to the chancellor than to either of their children.
“The more children you have, the worse it looks. I recently told one client that, on his death, each of his four children would get just 15 per cent of his pension, while the chancellor would take 40 per cent”, he said.
Meanwhile, Rob Mansfield, an independent financial advisor at Rootes Wealth Management, said it could put people off from saving into their pensions.
“It’s a double whammy if you’re over the age of 75, as not only could you pay inheritance tax on the pension at 40 per cent, but the beneficiaries would then pay tax on any withdrawals at their marginal rates.
“We need people to save more into their pensions, and taxing people for doing the right thing seems perverse.”
Former chancellor and businessman Nadhim Zahawi also took aim at the idea telling The Independent it could cause more wealthy individuals to leave the UK. He urged the Treasury to make further spending cuts rather than hiking taxes.
“If the chancellor wants a sure-fire way to endanger Britain’s finances further, raising inheritance tax would be top of the list”, he said.
“As a businessman, I know that top talent is leaving or staying away because they don’t want their life’s work stolen by a greedy government that won’t wean itself off an addiction to wasting taxpayers’ money through excessive spending.”
Meanwhile, Sarah Coles, head of personal finance at Hargreaves Lansdown, said reforms “would need to be balanced against the fact that, at the moment, these gifts allow for money to pass through the generations” – something which brings in taxes such as stamp duty and VAT when the money is spent.
“They also feed more money into the economy and boost economic activity”, she said, warning that a change in the rules could “stymie this flow of cash, which could have an impact on growth.”
The Treasury has been contacted for comment.
