First time homebuyers on lower incomes should be exempt from any planned new inheritance tax raid, the Chancellor has been warned.
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.
She is under pressure to ensure any changes do not hinder first time buyers who might rely on financial gifts to get on the property ladder and faces calls to exempt those on lower incomes.
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.
And, according to reports, Reeves is considering generating income by introducing a cap on the lifetime gifts that can be transferred before death without being taxed.
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.
Tightening these rules could mean any money given above a certain amount – regardless of the timing of the gift – would be subject to tax.
The Treasury is also said to be looking at changing the rules around the taper rate.
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.
The progressive policy think tank argues this would not only increase the tax revenue from wealthier recipients of large gifts but could also incentivize relatives to give money to less well-off beneficiaries.
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.
According to the Institute for Fiscal Studies (IFS) analysis of the Wealth and Assets Survey, around £14bn is transferred in gifts each year – £500 or more – in the UK.
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.
Meanwhile, research by think tank Demos found the UK raises less from inheritance taxes than almost every other G7 country that has a form of the levy.
In 2022, the Treasury collected £6.7bn through inheritance taxes compared to £15.7bn in France, for example.
The IPPR is arguing for a tax system that focuses on the wealth of those receiving financial gifts, rather than the gift itself.
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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She said: “The current system, which taxes the estate of someone who has died, often misses the mark by treating all inheritances the same regardless of who receives them. A fairer approach would be to focus on the person receiving the gift.”
IPPR has long been in favour of reforming inheritance tax to raise revenue as well as tackling rising wealth inequality, she said.
The think tank proposes a lifetime tax paid by the receiver – and linked to their income tax rate – on the total gifts received above an allowance of £125,000.
Gifts between spouses would remain exempt, and small gifts below a set threshold would not need to be declared.
“The tax should be re-designed so that people with higher incomes pay more on their inheritance, while those with lower incomes pay less,” Ms Sriram added.
“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.
“With the Autumn Budget approaching, now is the moment for the government to modernise inheritance tax and address intergenerational inequality.”
Reeves has been careful not to rule out further tax rises in the Budget, due to take place in the autumn.
She left the door open to focusing her efforts on overhauling inheritance tax, when asked earlier this week.
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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