Labour may hike inheritance tax to 50% and tax every gift in Budget | Personal Finance | Finance

Labour is yet to reveal its plans for the controversial “death tax”, but with PM Keir Starmer pledging not to raise taxes on “working people”, inherited wealth tax is a target.

This time last year, all the talk was that the Conservatives would cut or even abolish IHT, said Ian Dyall, head of estate planning at wealth manager Evelyn Partners. “The tables have turned on death duties. Now it’s in the Treasury’s crosshairs.”

IHT revenues are already rising. HMRC took a record £7.5billion in the 2023/24 tax year, more than double the sum generated a decade ago. Receipts are up almost 10% so far this year.

The trend is set to continue whatever Ms Reeves does, as the nil-rate band has been frozen at £325,000 for 15 years. If it had been linked to the retail price index, it would have almost doubled to £600,000.

With the average house now valued at £284,691 homeowners only need a small amount of savings or other assets to pay IHT.

More will get caught as former Tory chancellor Jeremy Hunt froze the nil-rate band at £325,000 all the way to 2028.

He also froze the £175,000 main residence band, which applies when families pass their home to direct descendants such as children and grandchildren.

IHT is charged at a brutal 40% if you pay. So what is Labour likely to do on October 30?

Last month, the Resolution Foundation think tank, which has close links to Labour, demanded that the £175,000 residence allowance was scrapped.

Dan Tomassen, tax director at accountancy firm HW Fisher, said Ms Reeves could go further and abolish the £325,000 nil-rate band, but warned this could backfire.

Jon Hickman, tax partner at accountancy firm BDO, said Ms Reeves could introduce progressive bands of IHT starting at 25% and perhaps rising to as high as 50% for the largest estates.

If he’s right, that would see Labour taking half of people’s inherited wealth when they die.

Reeves could also axe today’s gifting allowances, Mr Hickman said.

Today, every adult can give £3,000 in gifts every year with instant IHT exemption, plus limitless smaller gifts of up to £250 each to others.

People can also give £5,000 IHT free when children get married, falling to £2,500 for grandchildren and £1,000 for anyone else.

In a little-known tax rule, people can give unlimited gifts out of surplus income to loved ones, provided it doesn’t affect their own standard of living.

Other gifts are only free of IHT if you survive for seven years after making them, called potentially exempt transfers (PETs). The tax rate falls on a sliding scale in that time under taper relief.

Mr Hickman suggested Reeves could replace the lot with a single annual gift allowance of £10,000 a year. “This could include both larger gifts out of income and PETs,” he said.

In 2018, Reeves herself called for IHT to be “shifted wholesale to a tax on the receipt of any gifts throughout a lifetime” .

IHT on every gift you ever get? Let’s hope Reeves has changed her mind. It would ruin Christmas, for starters.

Reeves has other options. She could axe the IHT exemption for smaller UK companies listed on the alternative investment market (AIM), but that would smash growing businesses.

As we reported yesterday, Reeves is expected to impose IHT on unused defined contribution pension pots on death.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said this would be a blow to anyone planning to pass on their pension wealth to family members. “It would spur people to spend their pension or give it away while still alive.”

Reeves may also target Business Relief and Agricultural Property Relief, which allows families to pass on businesses and family farms without losing most of their value to inheritance tax.

Critics say many family-owned firms and farms would have to be sold, liquidated or broken up if Labour does this.

So what can people do to defend their wealth?

One option is to simply spend it. HMRC can’t tax money you don’t have. Alternatively, you could give it away to children, grandchildren and others you love.

However, you have to play by the rules or you could be taxed on the money anyway.

Duncan Mitchell-Innes, a tax partner TWM Solicitors, anticipates a rush of gifting ahead of the Budget, and suggests that people should make maximum use of this year’s £3,000 IHT-free gift allowance if they can.

Couples can double down by gifting £6,000, plus they can also mop up last year’s gift allowance if they didn’t use it. This could lift the total to £12,000.

Make wedding gifts if loved ones marry and smaller £250 gifts as well. And check out rules on making gifts from surplus income.

Whatever you do, keep a record of all your gifts for your executors, Mr Mitchell-Innes added. “Failing to keep records can lead to a lot of administration and detective work for your executors.”

Remember, if you give property, shares or cash away, you lose all control of them. You can’t simply ask for them back if you need them later.

This could be a real problem if you need to pay for care fees in later life.

Your local authority may decide you have given the money away to avoid paying yourself, known as “deliberate deprivation of assets”, and chase your heirs for the money.

There’s no escape and it will get worse as Labour tightens the rules. We’ll know more on October 30, but beware taking rash action today.