HMRC Urged to Increase Inheritance Tax Gifting Allowance to £11,600
A subtle rule change by HMRC is reportedly leading to higher tax bills for families, as inheritance tax undergoes a significant shake-up under the Labour Party government. The 40 per cent duty is set to be extended from April 2027, adding pressure on households already grappling with frozen thresholds.
Frozen Thresholds and Rising Costs
Inheritance tax thresholds have remained unchanged for numerous years, pulling more people into the tax net as property values and other assets have appreciated. Hannah Martin, a pensions specialist and founder of Rich Retiree, highlighted this issue, stating, "The nil-rate band has been fixed at £325,000 since 2009, and will remain frozen until at least 2030."
She further explained that the £3,000 annual inheritance tax exemption on gifts has been in place since 1981, with no adjustments for inflation. If it had risen in line with inflation, the allowance would currently stand at over £11,600, offering substantial relief to taxpayers.
Current Gifting Rules and Proposed Reforms
Under existing regulations, individuals are permitted to donate up to £3,000 annually, distributed among any number of recipients, without incurring tax. Additionally, they can give away any number of gifts of up to £250 to various people, provided other gifting allowances haven't been used for those recipients.
Ms. Martin suggested reforms to simplify the complex system, saying, "Some suggestions include simplifying the multiple allowances system we currently have, which includes a nil-rate band, residence nil-rate band, spouse exemption and gifting exemptions, and instead replace them with a single, larger tax-free allowance per person."
This change would streamline administration, enhance public understanding, and eliminate the need for early gifting to avoid the seven-year rule, which currently complicates estate planning.
Inheritance Tax Allowances and Exemptions
Currently, when a person dies, they can generally pass on up to £325,000 (the nil-rate band) tax-free. This amount rises to £500,000 if leaving a main home to children or grandchildren. Unlimited assets can be transferred to a spouse, civil partner, or charity completely free of inheritance tax, with unused allowances being transferable.
For married couples, this means they can leave up to £1 million tax-free, combining two £325,000 tax-free allowances and two £175,000 main residence allowances, provided they are legally married. The proposed increase in the gifting allowance aims to address the disparity caused by decades of inflation and make the tax system more equitable for all families.
