Treasury plans to tweak inheritance tax rules in the autumn budget would do little to bolster the country’s finances, economists have said.
Rachel Reeves is reportedly looking at tightening rules around the gifting of assets and money in a bid to help fill the UK’s multi-billion-pound fiscal shortfall.
The Chancellor is facing having to further raise taxes in the forthcoming Budget following a series of expensive u-turns on winter fuel allowance and welfare spending.
According to reports in The Guardian, Reeves has instructed officials to look at a potential cap on lifetime gifts, part of a broader review into how assets can be transferred before death to minimise inheritance tax liabilities.
But economists have cast doubt on how much the measure would raise, amid suggestions from experts that the Chancellor will need to raise at least £20bn and as much as £50bn by the Budget.
Tom Goddard, senior associate at accountancy firm Blick Rothenberg, said reforming inheritance tax (IHT) was unlikely to cover much of the hole in the public finances facing Reeves.
Mr Goddard believes Reeves would only be able to raise an extra £3bn through inheritance tax reform.
“IHT generates around £8bn per year. Given the latest deficit figures we are seeing are [at the extreme end] around £50bn, I don’t think tampering with IHT would be a particularly fruitful endeavour for her,” he said.
He said reforming gifting – known as potentially exempt transfers (PETs) – would be unlikely to impact many who pay IHT.
“PETs are only really relevant for wealthy individuals anyway, as they can afford to give away large sums/assets whilst still living. Typically, those who fall into this IHT bracket will be able to mitigate their IHT exposure by moving overseas, or even giving away even earlier.”
His comments were echoed by David Sturrock, associate director at the Institute for Fiscal Studies, who said the Treasury would need to introduce some “major” changes to the taxation on gifts to raise significant sums.
“There is scope for change, and there are good rationales for having a different system, in the same way that there could be a rationale for not taxing the gifts at all. But if you’re looking at the kind of incremental changes, it’s not going to be making much of a difference revenues-wise,” Mr Sturrock said.
Under current UK rules, gifts made more than seven years before a person’s death are exempt from inheritance tax.
Gifts made between three and seven years prior are taxed on a sliding scale, depending on their value and the total estate.
Last week, National Institute of Economic and Social Research (Niesr) predicted Rachel Reeves was now set for a £41.2 billion shortfall on her “stability rule” in 2029-30 and has been left with an “impossible trilemma” of trying to meet her fiscal rules while fulfilling spending commitments and upholding a manifesto pledge not to raise taxes.
In July, some Labour Party figures, including former leader Lord Neil Kinnock and Wales’s First Minister Baroness Eluned Morgan, called for a wealth tax.
One Labour backbencher backed the idea of increasing taxation on inheritance that is passed down from generation to generation.
“I think that there does need to be an increase in tax and inheritance tax, actually, I think it’s an easy one,” the MP said. “So many people’s overall estate is not even what they’ve labored for through their life, it’s their capital gains on it and it’s unearned wealth. If we have to raise money from somewhere, then it seems to me that increasing inheritance tax is probably the right thing to do.”
A Treasury spokesperson said: “The best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
“We are committed to keeping taxes for working people as low as possible, which is why at last autumn’s budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance or VAT.”
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