Families could face yet more inheritance tax changes amid claims that Chancellor Rachel Reeves is considering another raid on estates in her upcoming Autumn Budget. Officials are examining whether tightening rules around the gifting of assets and money could help address the UK’s multi-billion-pound fiscal shortfall, the Guardian reports.
Inheritance tax receipts hit £2.2billion in the three months between April and June 2025, according to data released by HM Revenue and Customs (HMRC) in July. This marks a £100million increase when compared to the previous tax year, and continues an upward trend over the last two decades. Nicholas Hyett, investment manager at Wealth Club, said: “Inheritance tax continues to be a meal ticket for HMRC. While wealth taxes, IHT’s uglier sibling, will be in the spotlight in the run-up to the Autumn Budget, it wouldn’t be entirely surprising to see further tinkering with IHT too.” So, what are the current inheritance tax rules, and what could change?
What is inheritance tax?
Inheritance tax is applied to the estate, including property, money, and possessions, of a person who has died if these assets are worth over a certain amount.
Currently, estates valued over £325,000 are taxed at 40%, a threshold known as the “nil-rate” band, which has remained unchanged since 2009. Ms Reeves has confirmed that these thresholds will stay frozen until 2030, despite rising inflation and house prices.
In addition to the standard nil-rate band, there is also the residence nil-rate band (RNRB), which was introduced in April 2017. The RNRB allows individuals to leave their main residence to direct descendants, such as children or grandchildren.
The RNRB is £175,000, making the combined total of the nil-rate band and the RNRB up to £500,000 for an individual who qualifies for both.
Married couples and civil partners can take advantage of the inheritance tax thresholds through a “transferable nil-rate band.” This allows the unused portion of the first spouse or civil partner’s nil-rate band to be transferred to the surviving partner’s estate upon their death, increasing the nil-rate threshold to as much as £1million.
There are several legal ways for families to manage their wealth inheritance tax efficiently and reduce their bill if they qualify to pay it, and one of which is gifting.
What are the current inheritance tax gifting rules?
At the moment, one way to reduce potential inheritance tax liabilities for loved ones is to “gift” your wealth to them before you die. However, there are strict rules to abide by if this is what you decide to do.
Starting with annual gift allowances. People can gift certain amounts of money to specific people every year, inheritance tax-free.
Single gifts of £3,000 can be made completely free of inheritance tax per year. This can either be to one person or split between several people, and the allowance can be carried forward one year if unused.
In addition, people can make small gifts of up to £250 per year. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided no other gifts are made to that person during the tax year.
You can also give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person.
No tax is due on any of these gifts if you live for seven years after giving them – unless the gift is part of a trust. This is known as the seven-year rule.
If a person dies within seven years of giving a gift and there’s inheritance tax to pay on it, the amount of tax due after death depends on when the gift was given.
Gifts given in the three years before death are taxed at 40%, whereas gifts given between three and seven years before death are taxed on a sliding scale known as ‘taper relief’.
The gift would be taxed at the following rates:
- If the person dies within three years of giving the gift – 40%
- If the person dies within three to four years – 32%
- If the person dies within four to five years – 24%
- If the person dies within five to six years – 16%
- If the person dies within six to seven years – 8%
- If the person dies after more than seven years – 0%
However, taper relief only applies if the total value of gifts made in the seven years before death is over the £325,000 tax-free threshold.
Additionally, a more “lesser-known” gifting allowance that people can make use of is the “normal expenditure out of income” rule. This allows people to give away any amount, inheritance tax-free, even if they die within seven years, as long as:
- They can afford the payments after meeting their usual living costs
- They pay from their regular monthly income.
This means this rule is subject to specific affordability tests and qualifying criteria. For example, gifts must be made from excess income and not savings, should not impact the person’s standard of living, and should form a regular pattern, for example monthly or annually. Therefore, the gifter must keep detailed records of their finances while they make these payments to prove eligibility.
What could change for inheritance tax in this year’s Autumn Budget?
Government U-turns over winter fuel payments and welfare reform have left the Chancellor with a multibillion-pound spending gap to fill, amid similarly controversial pushes for a “wealth tax” by some Labour MPs.
Among the reported inheritance tax measures under consideration is a potential cap on the lifetime gifts mentioned, as part of a broader review into how assets can be transferred before death to minimise inheritance tax liabilities.
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 £3.4billion.
“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.”
John O’Connell, an expert from the TaxPayers’ Alliance, said: “As if hammering family farms and clobbering small businesses wasn’t enough, Reeves now wants to launch a smash and grab on presents to children and grandchildren.
“This is nothing more than a shameless cash grab to paper over the cracks of a government that can’t control its own spending. Punishing parents and grandparents for treating their loved ones is little more than the politics of envy.
“Not only should this vindictive policy be ruled out immediately, but inheritance tax itself should be scrapped in its entirety.”
Chancellor Rachel Reeves will lay out this year’s Autumn Budget in October or November, but the official date has not yet been determined.
