Chancellor considers caps on lifetime gifting to plug budget black hole

It has been reported Chancellor Rachel Reeves is considering capping lifetime gifts in an attempt to plug the £50bn hole in the public finances.

First reported in the Guardian, the proposals could see the current rules around lifetime gifting, which enable unlimited amounts of money and assets to be gifted to friends and relatives without paying inheritance tax (IHT) provided they were gifted at least seven years before, to be amended. The current taper rate, between 8 and 32% applied to gifts between seven and three years before death, could also be targeted.

According to a source, the newspaper was told

“With so much wealth stored in assets like houses that have shot up in value, we have to find ways to better tap into the inheritances of those who can afford to contribute more.”

The government has already been warned changes to the tax regime could see behavioural change amongst the wealthy after the Capital Gains Tax changes saw a reduction in revenues from nearly £17 billion in 2022-23 to £13.1 billion in 2024-25.

Now Hilesh Chavda a partner at law firm Spencer West LLP, says a similar behavioural change could occur as a result of any proposed changes to IHT.

“Capping lifetime gifts could alter behaviour, potentially reducing overall tax revenue as individuals might retain assets in their estates, transferring them only upon death. This shift could significantly impact the economy and tax receipts. The effect of any cap on lifetime gifts largely depends on its design. A substantial cap, similar to the one in the US, might encourage long-term estate planning and facilitate the movement of assets.”

Rachael Griffin, tax and financial planning consultant at Quilter adds the proposals could see a ‘fundamental change’ to the way families pass on wealth

“Such a cap would bring more gifts into scope for IHT and could capture not just large transfers designed to reduce tax bills but also modest, routine support between family members.”

With frozen thresholds, rising property values and, from 2027, unused pensions being brought into scope, more families being drawn into the IHT net. Quilter’s own research shows UK retirees gift around £2,500 a year to loved ones, much of it to help with education and living costs.

“Introducing a lifetime cap would be a significant departure from current policy. The UK has never had such a limit, and if it were set too low it could affect a large number of middle-class estates, particularly in areas where property wealth alone can easily breach frozen thresholds. Tracking a lifetime cap could prove administratively complex, requiring HMRC to hold long-term records of gifts across decades and potentially leading to disputes where records are incomplete.”

The general consensus from commentators is this is another grab for another slice of the “great wealth transfer” – the largest intergenerational transfer of wealth in history from the baby boomer generation.

“If Rachel Reeves introduces a lifetime cap on the amount of money that can be gifted during a person’s lifetime, the options she has is either to have a yearly cap, i.e. £X amount can be gifted per year before gifting tax is charged, or a lifetime cap, so a number that can be gifted over a person’s life time.”

said James Ward, Head of the Private Client Practice at Kingsley Napley.

“Clearly she is trying to increase the tax take on the trillion pound handover of assets from the baby boomers, however there are potentially a number of unintended consequences such an approach could give.

In my experience, the younger generation have come to rely on the bank of Mum and Dad heavily and with the costs of living and housing at a record high, this reliance is increasing. If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes.

“It will also be very difficult to police a cap concept and will create a challenge for HMRC and a substantial amount of extra paperwork. I can forsee that a number of people could find their way around this by gifting items or contributing to large expenditure and not reporting it. So query how effective any new rules will be.”

He adds people may simply wait to put plans in place until the result of the next general election where is the Conservative party is elected, could see these policies redacted such is their opposition to them. Commenting on the rumours Sir Mel Stride, the Conservative shadow chancellor, said:

“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. Tax rises are coming to paper over the cracks of the Chancellor’s economic mismanagement. Nothing is safe under Labour – not your job, your business, your farm, your savings or your pension. Rachel Reeves is taxing your family’s future to fund her failure.”

Griffin adds any cap must be designed in a way that recognises the positive role intergenerational transfers play in supporting younger generations. She warns without careful thresholds and exemptions these regular transfers could be discouraged, limiting the flow of wealth through the economy, and unfairly penalising families who simply want to support their children and relatives.

She warns there are also potential unintended consequences.

“A cap might encourage people to make large gifts earlier in life to use up their allowance, potentially moving significant assets out of their control before they are financially ready. Others might explore more structured planning options, such as trusts, which can offer greater flexibility and control over how assets are managed and distributed. While these arrangements may involve professional advice, they can also provide long-term benefits, including safeguarding wealth for future generations and ensuring that gifts align with broader financial and family goals. However, whether these could be utilised would depend on how the rules are set out if changed.”

Other options open to the Chancellor include reviewing the outdated gifting allowances, which have been frozen for over 40 years, and shortening the gifting window from seven years to five and abolishing taper relief to make the system simpler.

“Other options would be to look at reducing the seven year rule – it has previously been five years in the past, having exemptions to any anti-gift provisions for businesses or farms, enabling business owners to retire and businesses to be preserved, and if gifting is abolished, giving people a higher lifetime IHT allowance, so that only substantial gifting from the very wealthy would be caught.“

concludes Hudda Morgan, partner at Spencer West LLP.