There have been a flurry of media reports that the Treasury is considering changes to the IHT regime at the next Budget in the form of a gifting cap or amending the tapering rules on gifting. The reports make clear nothing has been decided but the kite-flying will no doubt focus minds on estate planning in the weeks ahead.
If Rachel Reeves introduces a lifetime cap on the amount of money that can be gifted during a person’s lifetime, the options she has are either to have a yearly cap, i.e. £X amount can be gifted per year before gifting tax is charged, or a lifetime cap, so a number that can be gifted over a person’s life time.
Clearly she is trying to increase the tax take on the trillion pound handover of assets from the baby boomers, however there are potentially a number of unintended consequences such an approach could give.
In my experience, the younger generation have come to rely on the bank of Mum and Dad heavily and with the costs of living and housing at a record high, this reliance is increasing. If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes.
It will also be very difficult to police a cap and will create a challenge for HMRC and a substantial amount of extra paperwork. I can forsee that a number of people could find their way around this by gifting items or contributing to large expenditure and not reporting it. So query how effective any new rules will be. Also individuals could simply lend the money now and wait until Labour is voted out and the rules are reversed then turn the sums into gifts.
The US has a gifting tax but they also have a very high nil rate band where there is no estate duty on death. If the proposed Treasury measures come to pass the UK would be in danger of having the worst of both worlds; limited gifting and a low nil rate band threshold.
For clients with substantial wealth to pass on, this could be another factor contributing to a decision to leave the UK in order to make giftings and to prevent them losing 40% of their wealth on death. Clearly this would not be a good scenario for the UK.
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James leads both the Private Client Department and Private Wealth Group at Kingsley Napley. He provides individuals and their families in the UK and abroad with a comprehensive, efficient and discreet private wealth service.
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