Families urged to make gifts NOW to beat inheritance tax clampdown if Labour wins election

We may have a clearer idea of what Keir Starmer and shadow chancellor Rachel Reeves will do when Labour publishes its manifesto today. Either way, experts are warning there is no time to lose.

Reeves has previously said she would like to introduce inheritance tax on "any gifts" people receive during their lifetime, in what would be a radical and costly change.

As yet, we don't know what she'll do, but people worried about an IHT bill won't want to take chances.

Strict new rules could come into force shortly after the election, if Starmer and Reeves decide to hold an emergency Budget.

Otherwise the changes could come in November in an Autumn Statement.

Julia Rosenbloom, tax partner at law firm Shakespeare Martineau, warned that anyone thinking of making a gift to loved ones should consider doing this prior to a potential post-election Budget, if possible. “Currently, there is no IHT on gifts as long as the person gifting survives the transaction by seven years. This could change.”

Rosenbloom has drawn up a list of potential taxes that Labour could tighten if it wins, and inheritance tax is on the list. "With neighbouring countries in Europe already implementing a gift tax it is possible the UK could follow suit.”

Inheritance tax bills have risen sharply under the Conservatives, making planning important for every family regardless of the result on July 4.

The £325,000 nil-rate IHT band has not increased since 2009 and Conservative chancellor Jeremy Hunt has frozen this until 2028, dragging more people into the net as stock markets and house prices rise in value.

People can pass on another £175,000 free of IHT when handing their main residence to direct descendants on death (unless their estate is worth more than £2million).

Any assets above that are taxed at a punitive rate of 40 percent. Pensions are an exception as they are currently IHT-free, but Reeves could change that, too.

Married couples and civil partners can inherit each other’s allowances, allowing them to pass on up to £1million tax-free.

Many further reduce their exposure by making tax-efficients gift to loved ones.

Under current rules, gifts are completely free of IHT if you live for seven years after making them, known as potentially exempt transfers, or PETs.

However, the tax charge reduces on a sliding scale known as taper relief, falling as low as eight percent after six years. Reeves could scrap the system so all gifts incur IHT right away.

A range of gift allowances offer instant exemption but they have been frozen for years reducing their value in real terms. Now Reeves could scrap them, too, so families should use them while they still can just in case.

Today, you can gift £3,000 to anybody you choose, with instant IHT exemption. Couples could therefore gift £6,000 in total.

If you did not use last year's gift allowance, you could give £6,000 in total (rising to £12,000 for couples).

If all that was subject to IHT at 40 per cent, the tax saving would be £4,800.

You can also give unlimited gifts of up to £250 to any number of people, provided they haven't benefited from the £3,000 exemption.

Laura Suter, head of personal finance at AJ Bell, said everyone can also make IHT-free gifts when loved ones marry. “These are up to £5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else.”

In a little-known exemption, gifts paid out of surplus income, which are not deemed to affect your standard of living, are IHT free. The gifts cannot come from capital.

Gifts out of surplus income could include regular payments into a children’s savings account, or paying a life insurance premium for your spouse or civil partner.

Suter warned: "Tax planning can be difficult as we don't yet know what the next government will do, but it is worth being prepared."

READ MORE: Your expert guide to inheritance tax - from what it is and who pays to how to reduce it