Tax
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.