Inheritance tax rule could be 'abolished' by Rachel Reeves to 'raise money for Treasury'

The warnings come after the Chancellor's October Budget decision to include unused pension pots in inheritance tax, which is set to come into effect for estate holders on April 2027.

Wealth advisers suggest the gifting rule could be targeted as part of a renewed drive to increase revenue. Inheritance tax is currently charged at 40 per cent on estates worth more than the nil-rate band of £325,000.

Through the seven-year rule, individuals are able to pass down money or assets either tax-free or at a reduced rate if they survive for seven years after making the gift.

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HM Revenue and Custom's (HMRC) tax receipts are rising, with £6.3billionn collected between April and December 2024, suggesting a record year for inheritance tax collection.

Despite this increase, death duties account for less than one per cent of total government revenue.

Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, said: "Inheritance tax and gifting has been brought to the forefront of conversations [with clients]. People have already taken preventative action on the seven-year front."

Shah warned that the Chancellor might return to inheritance tax as a source of additional revenue. "Reeves could go back to inheritance tax to raise money. One way is to extend it to 10 years or abolish it completely and introduce a lifetime gift allowance," he said.

Ian Cook, the financial adviser at Quilter Cheviot, warned the gifting rule was "under threat" in the Spring Statement as the Chancellor attempts to plug the £22billion "black hole" in the public finances.

"The seven-year rule could be the next easy target. Switching from seven to 10 years is a very easy change to make. I wouldn't be surprised if the Government announces a review of the process," Cook said.

The potential changes come as inheritance tax receipts continue to climb, with HMRC on course for record collections this financial year. Jason Hollands, managing director at Evelyn Partners, said changes to gifting rules "couldn't be ruled out".

He noted a significant increase in client conversations about inheritance tax in recent months, particularly regarding pension assets.

"It would be potentially a very negative move if they pushed [the number of years] up further," Hollands warned.

He suggested the Government could frame such changes as pro-growth rather than a tax increase, following Reeves's commitment to a third runway at Heathrow and promise to cut regulation.

"You can see why a Government talking about growth could dress up a change as less of a tax raid, and more a way of encouraging people to do more gifting now, so money is spent in the real economy, rather than being sat in mature assets," he said.

A Treasury spokesman maintained a neutral stance on the speculation, stating: "Gifting assets is a normal part of the inheritance tax system."

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The Government has come under fire for its decision to include pension pots into inheritance tax liability as many Britons could find themselves pulled into paying the levy.

Steve Hitchiner, the chair of the SPP Tax Group, said: "The decision to impose IHT on unused pension pots from April 2027 is perhaps unsurprising, particularly given the Government’s estimated savings of around £1.5bn annually by 2030.

"To raise this revenue, issues relating to the reporting and payment of this tax are vitally important. The current proposals will result in numerous problems and challenges which could be largely avoided by adopting either of the SPPs recommended alternatives.”