London families pay billions in inheritance tax amid proposed gifting reforms

In the United Kingdom, the 2022-23 tax year saw significant changes in inheritance tax collections, particularly in London, where estates contributed over £1.5 billion to the Treasury. This surge can be attributed to rising house prices alongside frozen inheritance tax allowances, which have increasingly pulled families into the tax net. The national total for inheritance tax payments reached £6.7 billion, with London alone accounting for a considerable share and paying three times more than Scotland, Wales, and Northern Ireland combined. The increasing pressure and scrutiny around inheritance tax have sparked proposals from government figures, such as Rachel Reeves, to introduce a lifetime cap on tax-free gifts in an upcoming autumn Budget. This potential cap aims to better address the significant wealth tied up in property assets and ensure that those with greater means contribute meaningfully to the tax system. The existing gifting rules allow individuals to make annual tax-free gifts up to £3,000, with further exemptions for weddings and small gifts. Additionally, large gifts become 'potentially exempt transfers,' whereby they only evade inheritance tax if the donor survives for seven years after making the gift. If the donor passes away within this timeframe, the gift is added back to their estate and taxed accordingly. With these regulations, many families are encouraged to engage in estate planning to minimize their inheritance tax burdens strategically. Further complicating the situation are the upcoming changes in legislative measures affecting agricultural and business property relief, due to be less generous starting April 2026. Changes are also on the horizon for pension pots, which will be brought into the tax net in 2027. These anticipated reforms are expected to broaden the scope of inheritance tax, impacting even more families and prompting a rise in inquiries regarding estate planning and tax management. Financial advisers warn against potential loopholes within the shifting landscape of inheritance tax, urging customers to remain vigilant in their approaches to gifting and estate organization. The current framework, frozen since the 1980s, is under increasing scrutiny from experts and officials alike, as they advocate for adjustments reflecting modern property values and living conditions. The current nil-rate band allowance, fixed at £325,000, and the residence band of £175,000, are expected to remain unchanged until at least 2030. This ongoing freeze raises broader concerns about its implications for families who may find themselves unexpectedly liable for inheritance taxes as their asset values grow, often outpacing the allowances set decades ago. As discussions unfold around these significant financial reforms, it remains essential for families to understand their standing and plan accordingly.