Inheritance tax tightening may hinder economic expansion, according to Labour's caution.
In the UK, the Treasury is considering significant changes to the rules surrounding Inheritance Tax (IHT), which could have far-reaching implications for gifting, asset transfer, and economic growth.
Economic Growth
One of the key concerns is that tightening IHT rules, such as reducing exemptions on lifetime gifts or extending the 7-year rule to 10 years, may discourage wealth transfer during lifetimes. This could potentially limit family wealth mobility and entrepreneurial activity, potentially damaging UK economic growth [4][5].
Bank of Mum and Dad
Stricter IHT rules on gifting could impact the so-called "Bank of Mum and Dad," which refers to parents financially supporting children, often with deposits for home purchases. Introducing a lifetime gifting cap, for example, £100,000 tax-free lifetime gifts, would limit tax-free transfers, making it costlier to gift substantial sums. This may reduce intergenerational financial support and increase family tax burdens [5][4].
Complexity for Taxpayers and HMRC
The proposed reforms, such as introducing a lifetime gifting cap, extending the survival period for exempt gifts, and redefining UK domicile rules focusing on long-term residence, will complicate estate planning. Taxpayers will face increased compliance challenges and uncertainty, particularly international couples affected by the switch from domicile to a 10-of-12-year UK residence test. HMRC will also encounter heightened administrative burdens due to expanded IHT scope, more estates subject to tax, and transitional arrangements for trusts and foreign assets [1][2][3][5].
The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness has recommended a flat rate of tax on all lifetime gifts, a proposal that has received backlash from top investment managers [6]. The changes could involve replacing the "taper relief" tax rates on gifts made seven years before someone dies, creating a "cliff edge" system where people who die one day short of seven years could be "hit with a huge tax bill" [7].
Mel Stride, the Conservative shadow chancellor, has stated that those who have worked hard, saved, and want to pass something on to their loved ones shouldn't be punished by yet more taxes from Labour [8]. Stride also accused the Chancellor of economic mismanagement, suggesting that tax rises are being considered to cover up for this [9].
Internal analysis from the Office for Tax Simplification has stated that bureaucracy on inheritance tax and gifting rules has confused Brits [10]. James Ward, head of private client practice at Kingsley Napley, warned that taxing gifts could lead to younger generations receiving less cash from the Bank of Mum and Dad [5].
Hargreaves Lansdown, a company working with the Treasury on increasing retail investment, has suggested that Labour may "come to regret" making complex changes to inheritance tax [1]. The company has also stated that these changes could potentially damage UK growth [1].
In summary, these changes aim to widen the inheritance tax net and increase revenues but could discourage gifting, reduce financial support from parents to children, and add significant complexity to tax compliance and planning in the UK. The Guardian has reported about these potential changes to the inheritance tax rules [2]. These changes could stymie the flow of cash, which could have an impact on economic growth.
- The changes in Inheritance Tax (IHT) rules, such as reducing exemptions on lifetime gifts and extending the survival period for exempt gifts, could potentially discourage gifting and have a negative impact on economic growth.
- The proposed changes, including a lifetime gifting cap and more stringent rules on UK domicile, will make estate planning more complex for taxpayers, leading to increased compliance challenges and uncertainty.
- Central to the concerns is that stricter IHT rules on gifting could impact the ability of parents to financially support their children, particularly with large deposits for home purchases, thus potentially reducing intergenerational financial support.
- Robert Jenrick, a Conservative minister, highlighted the importance of personal-finance planning, stating that the government should not be unnecessarily tampering with people's ability to decide how the fruits of their labor should be distributed.
