Rachel Reeves is said to be eyeing up an increase to taxes applied to gifts of assets or money, in a bid to shore up public finances in her next Budget.
U-turns over money-saving policies, such as cuts to winter fuel payments and disability benefits, have left the government with a multibillion-pound spending gap to fill.
Under current UK rules, gifts made more than seven years before a person’s death are exempt from inheritance tax.
Tightening these rules could mean any money given above a certain amount – regardless of the timing of the gift – would be subject to tax.
Introducing a system whereby anyone who receives more than £125,000 in gifts – over their lifetime – is taxed on it based on their income, rather than the size of the gift, would ensure those on lower wages pay less, the Institute for Public Policy Research (IPPR) said.
And, for first-time homebuyers, the system could be designed so that those who are lower-earners could benefit from reduced inheritance tax, helping to make homeownership more attainable.
Some 90 per cent of gifts are worth less than £20,000 and the top five per cent of all gifts account for around half of all of the value transferred, the IFS said.
In 2022, the Treasury collected £6.7bn through inheritance taxes compared to £15.7bn in France, for example.
Economist Aditi Sriram told The i Paper the UK was currently “an outlier among advanced economies in how lightly it taxes inheritances”.
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IPPR has long been in favour of reforming inheritance tax to raise revenue as well as tackling rising wealth inequality, she said.
Gifts between spouses would remain exempt, and small gifts below a set threshold would not need to be declared.
“This creates a system that increases contributions from those with the broadest shoulders whilst reducing the impact for prospective first-time homeowners on lower- and middle-incomes.
Reeves has been careful not to rule out further tax rises in the Budget, due to take place in the autumn.
Pushed on whether taxes will have to increase in the autumn, she said: “We’ll wait for the official forecast from the Office of Budget Responsibility, and we’ll make those decisions in the round.”
The government has been contacted for comment.
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