Amid press speculation that the UK will start to cap gifts to potential heirs and others, the editor mulls over how the tax authorities will target an increasingly wider base of the public, with potentially damaging consequences down the line.

We need to talk about intergenerational wealth transfer. For as long as I have written on wealth management, this has been a dominant financial topic worldwide. And while there’s far more to it than dealing with tax, it’s a large part of the picture. There’s no getting away from it. 

And it appears that in the UK, there’s no avoiding Rachel Reeves, Chancellor of the Exchequer, either. She’s rumoured to be looking at capping how much one can gift to another before death, free of tax. Today, gifts made seven years before someone dies are not subject to inheritance tax (IHT); those given three to seven years before death are taxed on a sliding scale, with the rate falling each year from 32 per cent to 8 per cent. Reeves has already continued to freeze the threshold for IHT at £325,000 ($441,258) – as was also the case under the previous Conservative government. This means that more people have been caught in the IHT net as asset values have risen.

Consider what has happened already. In late October 2024 Reeves introduced a Budget that widened the scope of inheritance tax to the anger of farmers and family-run firms; she also went after resident non-domiciled persons (to be fair, this was also the line of her Conservative predecessor, Jeremy Hunt). Her inclusion of worldwide estates of non-doms in any IHT reckoning has encouraged thousands to leave the UK. National Insurance contributions on employers went up, and to no-one’s surprise, if they understand business, growth has stalled. Large pay hikes for certain public sector employees, however well deserved they might be, also cost money. 

The government has struggled to contain spending, as shown by backbench Labour MPs’ hostility to cuts to disability benefits, which bodes ill for any attempt to reduce the problem of work-age adults not seeking a job. About nine million people aged between 16 and 64 in the UK are not in work nor are they looking for a job (source: BBC, 12 March 2024). Throw in the impact of Donald Trump’s tariffs and the frictional impact of Brexit, and it is not a pretty picture. We seem to be in a sort of doom loop of falling revenues, demand for more taxes, and a flatlining economy. 

But I cannot see Reeves changing tack now. Ironically, with Labour performing poorly in the public opinion polls (25 per cent, according to the latest Ipsos poll), she and her colleagues might be tempted to say “damn the torpedoes” and tax the middle classes even more. This government is, assuming that the polls are accurate, likely to lose all, or most, of its parliamentary majority at the next general election. (The same Ipsos poll puts Reform at 34 per cent and the Conservatives at a meagre 15 per cent, with the Greens, Liberal Democrats and others making up the rest.) 

The government therefore is looking at the wealth transfer phenomenon as one to be milked. Rising asset values – aggravated by more than a decade of central bank money printing – have been a boon to parts of the public, particularly those who no longer worry about mortgage bills. 

Capping gifting is going to affect a wide number of people who are trying to give their children and grandchildren help through the earlier parts of their lives. 

There are various concerns about such a move – and wealth managers have already aired them. There are other criticisms that I also make. For example, the impact on incentives. Consider that many people like to gift wealth to children and grandchildren to help them with things such as buying a home, paying for college fees, etc. This may surprise some, but not everyone is motivated only by a desire to enrich themselves – they also think of their offspring, other family members and friends, as part of what motivates them to put in the hard yards at work.

And remember that as it was made, the wealth a person has amassed has already been subjected to tax in the first place – under sales, income, capital gains and other taxes. Inheritance tax hits people for a third or fourth time on what they’ve made. Given the distortions and issues that UK inheritance tax give rise to, such as an increasingly Byzantine attempt to avoid it via trusts, insurance and offshore structures (which often don't work or cost a lot of money in fees), there is a strong case in my view to abolish inheritance tax and perhaps impose a simple, low tax on inheritors rather than pay it from the estate of the deceased. The current system is complicated, and frankly cruel when it affects people who have just lost a loved one.

Capping gifts on intergenerational transfers when the granter of a gift is still around and working away to build wealth, seems objectionable if you believe in property rights. This will only further weaken the desire of people to want to build a life not just for themselves, but those who come after them. It's hard to see how this is going to build a stronger appetite to create wealth in future.