Tax

UK Government's Rumoured Gift Squeeze Puts Wealth Planning In Focus

Tom Burroughes Group Editor 14 August 2025

UK Government's Rumoured Gift Squeeze Puts Wealth Planning In Focus

With a Labour government wrestling with a large fiscal shortfall (arguably, partly self-induced) and eyeing the wealth of the UK's middle class, there is media chatter that the Chancellor of the Exchequer might cap the amount that people can transfer to heirs before death.

The UK government, which faces a budget “black hole” of up to £40 billion ($54.3 billion), is reportedly mulling a lifetime limit on how much families can give away before depth.

The suggestion of such a move drew mixed, mostly sceptical, reactions from wealth advisors.

Rachel Reeves, Chancellor of the Exchequer, may consider changing the existing rule on gifts. 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 – as also was the case under the previous Conservative government. Consequently, more people have been caught in the IHT net as asset values have risen. The Chancellor has also extended IHT to business and agricultural property, and to private pension pots, causing protests from farmers and others.

A possible cap on gifting will be a further blow to the UK middle class, advisors said. 

“Reports that the Treasury is considering a lifetime cap on the value of gifts a person can make before death without incurring inheritance tax would represent a fundamental change to the way families pass on wealth. Such a cap would bring more gifts into scope for IHT and could capture not just large transfers designed to reduce tax bills but also modest, routine support between family members," Rachel Griffin, tax and financial planning expert at Quilter, said in a note. 

“More people are already being drawn into the IHT net due to frozen thresholds, rising property values and, from 2027, unused pensions being brought into scope. At the same time in recent years, the cost of living has squeezed household finances and families increasingly want and need to help each other financially. Quilter’s research shows UK retirees gift around £2,500 a year to loved ones, much of it to help with education and living costs,” Griffin said. 

Hilesh Chavda, partner at law firm Spencer West, said such a change would prompt more tax planning moves to counter the impact. 

“Capping lifetime gifts could alter behaviour, potentially reducing overall tax revenue as individuals might retain assets in their estates, transferring them only upon death. This shift could significantly impact the economy and tax receipts. The effect of any cap on lifetime gifts largely depends on its design. A substantial cap, similar to the one in the US, might encourage long-term estate planning and facilitate the movement of assets,” Chavda said.

With public finances under strain, Reeves’ options are narrowing (some would argue that her own spending policies and tax hikes have made the problem far worse). Reeves’ rise in employers’ National Insurance contributions, for example, has been blamed, along with other factors, for hurting UK economic growth, creating a sort of “doom loop” of sluggish growth, falling tax revenue, and demand for higher taxes. The end of the UK’s resident non-domicile tax system has been blamed for prompting thousands of wealthy foreigners into leaving the country, shrinking the tax base. Critics say the UK is now taxing at a level that in fact reduces, rather than increases, revenue.

Big departure
Quilter’s Griffin said that a cap on gifts would be a significant move away from current practice. 

"The UK has never had such a limit, and if it were set too low it could affect a large number of middle-class estates, particularly in areas where property wealth alone can easily breach frozen thresholds.

Tracking a lifetime cap could prove administratively complex, requiring HMRC to hold long-term records of gifts across decades and potentially leading to disputes where records are incomplete,” she said. 

“There is also the risk of unintended behavioural shifts. A cap might encourage people to make large gifts earlier in life to use up their allowance, potentially moving significant assets out of their control before they are financially ready. Others might explore more structured planning options, such as trusts, which can offer greater flexibility and control over how assets are managed and distributed. While these arrangements may involve professional advice, they can also provide long-term benefits, including safeguarding wealth for future generations and ensuring that gifts align with broader financial and family goals. However, whether these could be utilised would depend on how the rules are set out if changed,” she said. 

“If a lifetime cap is introduced, it must be designed in a way that recognises the positive role intergenerational transfers play in supporting younger generations. Without careful thresholds and exemptions, a cap risks discouraging these transfers, limiting the flow of wealth through the economy, and unfairly penalising families who make regular small gifts over many years,” Griffin added. 

Hudda Morgan, partner at Spencer West LLP, said if gifting is capped, it would put the UK in line with practice in other developed countries

“For the whole of my career there has been talk of the Boomer bulge and inverted population pyramid, largely caused by significant increases in birth rates following WW2. This cohort are now reaching their 70s and 80s and, having benefited from strong and stable economic conditions and rising house prices, are now creating one of the largest and most widespread wealth transfers the world has ever experienced,” Morgan said. 

“This coincides with the need for the UK government to raise funds to both meet their commitment to cover spending from current revenue, alongside filling their inherited, estimated £20 billion shortfall. It comes as no surprise that the government are looking at the two circumstances together and seeing what opportunities there are to generate additional tax revenue.

“Capping lifetime gifts would be an option and is a route that other countries take. In the UK we have a rule where true gifts often fall out of the inheritance tax calculation totally, provided the donor survives by seven years. In other countries this seven-year rule doesn’t apply. Instead, each person is given a total lifetime inheritance tax allowance, which can be used in lifetime or on death estate, but not both and there’s no 'wiping the slate clean’ after seven years,” Morgan said. 

But there are risks to such a change, Morgan said: “Changing the gifting rules will be criticised because it can have an adverse effect on business, deterring the passing of businesses through the generations. With assets like cash and chattels it can also be hard to police.

“Other options would be to look at reducing the seven year rule – it has previously been five years in the past, having exemptions to any anti-gift provisions for businesses or farms, enabling business owners to retire and businesses to be preserved and, if gifting is abolished, giving people a higher lifetime IHT allowance, so that only substantial gifting from the very wealthy would be caught,” Morgan added. 

Another advisor said much will depend on how a cap would be structured.

"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 that a number can be gifted over a person’s lifetime,” James Ward, head of the private client practice at law firm Kingsley Napley, said. 

“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,” Ward continued. 

“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 concept 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 [I] 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 have a gifting tax but they also have a very high nil rate band where there is no estate duty on death. The UK is 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, it's possible they could leave the country in order to make giftings and to prevent them losing 40 per cent of their wealth on death. This scenario would clearly not be good for the UK,” Ward added. 

Surpluses
Coinciding with media speculation about what Reeves might do, TVM Solicitors said its research shows that the value of “gifts out of surplus income” rose by 177 per cent to £144 million in the 2023/24 tax year, rising from £52 million in 2022/23. 

To qualify, these gifts must come from surplus income (such as unused salary, pension or dividends) and not from assets such as savings or shares. There is no limit on surplus income gifts and they do not affect individuals’ £3,000 annual gifting allowance, TWM Solicitors said. 

Such gifts must not reduce the donor’s standard of living – the donor cannot use their savings to cover everyday expenses after making the gift.

TWM says that after recent cuts to tax reliefs, UK individuals are increasingly turning to surplus income gifting to reduce growing inheritance tax bills.

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