The Treasury is reportedly exploring various options to increase the tax receipts generated by inheritance tax (IHT), with suggestions that a lifetime cap on gifts could be introduced and that the current IHT rules on gifts more generally are under review.

The former option of a lifetime cap could potentially lead to an effective gift tax, in addition to IHT, and the latter could see gifts remain potentially taxable for longer than the typical seven-year period. It would be easy to see the appeal for the Treasury to extend the current seven-year rule to a 10-year one, aligning it with similar IHT timelines recently introduced as part of the abolition of the non-dom regime.

However, if the objective of this exercise is to provide the government with some extra fiscal headroom, then it will be challenging for anyone in the Treasury, and in due course the Office for Budget Responsibility, to predict the financial outcome with any degree of certainty. There is likely to be very limited data on the level and volume of gifts made each year by individuals. HMRC will hold some information on gifts, such as immediately chargeable gifts into trust, but this data is unlikely to be sufficient to support accurate estimates.

Such IHT reforms are also unlikely to represent a quick win for the Treasury in terms of extra tax receipts. It will take some time for revenues to flow through and will undoubtedly distort taxpayer behaviour in response. One possible response over the longer term is that those who can afford to do so will make gifts earlier in their lives to the next generation, whilst asset values are lower. The growth would then fall outside of a lifetime cap and in the hands of the next generation instead.

That might then beg the question as to whether it is worth the effort. IHT is arguably the most emotive of all the UK taxes, with the propensity to elicit strong reactions from those who may not even be impacted by it. There may well therefore be a strong public response to any such changes, bearing in mind that it is expected that it will be the estates of the oldest in society who will likely be hardest hit.

Put simply, older taxpayers may not have as much time to plan in advance, compared to younger taxpayers. In addition, and as we have highlighted in the past, IHT is already falling more heavily on the shoulders of female-owned estates, potentially fuelling further calls of its unfairness if the reasons for that do go beyond increased life expectancy. It could lead policy makers to feel somewhat uncomfortable in their target for such tax rises.

There are wider arguments beyond short-term revenue raising and ultimately those who may really feel the financial consequences of such IHT changes are millennials and others hoping for a final helping hand from the bank of mum and dad. The Chancellor may not quite fall into the millennial camp but she may well be aware of the concept of the ‘inheritocracy’, highlighted by Dr Eliza Filby in her book exploring the impact of inherited wealth on a generation of UK taxpayers.

Millennials are seemingly having to rely more on gifts from family and relatives than in previous generations. For example, The Institute for Fiscal Studies has previously highlighted research that indicates that 1980s-born children of the wealthiest fifth of parents could see inheritances represent 30% of their lifetime income, compared to 17% for those born in the 1960s.

If IHT changes like those rumoured are introduced, they may be justified as a means of trying to address the issue of wealth inequality without the introduction of a wealth tax. A section of millennials may feel harshly treated by such IHT changes but whether there would be a longer-lasting impact on wealth inequality is unclear. It might simply skip a generation as parents seek to accelerate the timing of gifts instead. If recipients of gifts receive them earlier in life this could compound the difference, and the issue, over the longer-term between those who can benefit from an early inheritance and those who cannot.

Related insights