Act now to get ahead of potential Inheritance Tax changes

With a projected £50 billion shortfall in public finances and a pledge not to raise income tax, National Insurance or VAT, speculation is mounting that Chancellor Rachel Reeves may turn again to Inheritance Tax (IHT) reform in her autumn budget statement.

Among the rumours circulating are the abolition of the ‘seven-year rule’ and the introduction of a tax on lifetime gifts. While these remain unconfirmed, recent history tells us that when changes to IHT are announced, they often take effect immediately, leaving no time to adjust estate planning strategies.

This could have significant consequences for business owners, farmers, and individuals with substantial pension assets. These groups often rely on lifetime gifting and long-term planning to mitigate IHT exposure. This is especially relevant given the significant restrictions to business and agricultural property relief due to take effect from April 2026. If the Chancellor moves to tax lifetime gifts or shortens the exemption window, the financial impact could be swift and severe.

What are the current rules?

Under the current system, lifetime gifts to individuals are treated as Potentially Exempt Transfers (PETs). If the donor survives for seven years after making the gift, it falls outside the estate for IHT purposes and is not taxed. If the donor dies within seven years and their nil-rate band has already been used up by previous gifts, subsequent gifts may still benefit from taper relief, which reduces the tax payable depending on how long ago the gift was made. For example, gifts made three to four years before death are taxed at 32%, while those made six to seven years prior are taxed at just 8%.

There are also annual exemptions: individuals can gift up to £3,000 per year and small gifts of up to £250 per person are also exempt. Gifts between spouses or civil partners are entirely free of IHT.

What might be changing?

The Chancellor is reportedly considering extending the seven-year rule to ten years, or abolishing it altogether, replacing it with a lifetime gift allowance. This could mean that gifts made during a person’s lifetime could be taxed regardless of when they were made, unless they fall within a new, capped allowance.

Additionally, unused pension pots are set to be included in the IHT framework from April 2027, a move that will significantly affect those with large retirement savings.

When should I act?

If you’ve been considering passing on assets or making significant gifts, now is the time to seek advice. The gifting rules are complex, and it’s essential to ensure you don’t fall foul of anti-avoidance provisions or the reservation of benefit rules, preventing donors from retaining a benefit from any gift.

Waiting until the budget announcement could mean missing the opportunity to make tax-efficient decisions under the current rules.

Estate planning is complex and deeply personal, but with potential reforms on the horizon, taking proactive steps now could protect what matters most to you and your family. Whether you’re a business owner looking to pass on an interest in a family business, or someone with a large pension pot, now is the time to review your position.

The autumn budget may bring clarity, but it may also bring change. When it comes to IHT, change rarely waits.

How can we help

Emma Read is a Director in the Private Client team at Anderson Strathern, based in Edinburgh. She advises individuals, families, and business owners on estate planning, succession, and tax mitigation strategies.

You can contact her anytime for advice on the issues raised in this article at Emma.Read@andersonstrathern.co.uk