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Inheritance Tax shake-up – how it could affect your family
August 19, 2025
According to leaked information from the Treasury, such changes may include:
If such changes are made, this could revolutionise the IHT landscape as the gifting of wealth to loved ones has been a key part of estate planning for many years. This is because, if done effectively, gifting assets lowers the value of your estate and in turn reduces your IHT bill.
Everyone has an allowance of £3,000 per year, which is immediately exempt from IHT (the annual allowance). Small gifts of £250 per year or less are also exempt (small gift allowance). At the moment, it seems that there are no plans to change either of these allowances.
Larger gifts can be made, but are subject to rules, which you may have heard about: The Seven Year Rule. The current rules allow you to gift an unlimited amount to any person with no immediate charge of IHT (the rules are different for transfers to Trusts). However, if you die within the seven years following the gift, all or some of the value of that gift will form part of your estate for IHT purposes and become taxable (this is why they are called potentially exempt transfers).
If you die within the seven year period, the amount of the gift that is subject to IHT depends on how long has passed since the gift was made (this is known as taper relief). If you die within the first three years, your estate will pay the full 40% IHT, if you die between year 3 to 4 it reduces to 32%, then 16% between years 5 to 6 and if you die between years 6 to 7 the rate falls to 8%.
If you survive the seven years then the value of the gift falls outside of your estate and is not considered for IHT.
At the moment, many people, even of moderate wealth, use PETs as an effective way to mitigate the IHT burden for passing on wealth to their loved ones – put simply, for every £100,000 gifted by someone who survives for seven years, £40,000 can be saved in IHT.
Should the proposed changes be made to the rules for this exemption, it will affect a very significant amount of people, and result in a much greater tax return from IHT.
Although not as well-known as PETs, gifts out of income can also be used to reduce the amount of IHT payable. You can make gifts from any spare income you may have, which is unlimited and immediately exempt from IHT (i.e. there is no Seven Year Rule for this exemption). The rules regarding gifting out of income are quite strict, meaning that you must be able to prove that the money came from income and not from your savings or a sale of a property etc. and ideally be gifted within one year of you receiving the income. The gifts must not reduce your standard of living, which means you cannot gift out of income and then use your savings to cover daily expenses following the gift.
While not used as much as PETs, the gift out of income exemption does offer many people who perhaps have significant pensions or other income, a way of passing on their wealth to their loved ones when, perhaps, they are not in a position to spend that income any more themselves.
Again, by abolishing or changing the rules regarding this exemption, the ability to plan for IHT becomes even more limited, meaning, no doubt, a greater tax return for the Treasury.
The proposed changes are not yet confirmed as the Treasury are currently exploring their options. However, if you were considering IHT planning – particularly by using the exemptions outlined above, it may be worth considering doing so before the Autumn budget.
We will be writing about any further updates, once we hear them.
Regularly review your estate planning to maximise the benefits of any of the exemptions and reliefs available to you.
If you feel you can afford to do so, make lifetime gifts – bearing in mind that the exemptions and seven year rule relating to these and the potential for changes to this exemption as outlined above.
Trusts can be used to manage and distribute assets while potentially reducing IHT liability, but must be set up and managed correctly to avoid unwanted consequences.
Keep your Will up to date – take advice when doing so to ensure that it is drafted in the most tax-efficient manner.
If you would like more information about Inheritance Tax, estate planning or anything relating to your Will, you can contact our Wills solicitors on 02920 829 100 or via our Contact Us form.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
